Just as their are a variety of home sales and price ranges in central Oklahoma, there are nearly as many ways to finance a home. Figuring out what type of loan works best for you can be complex and require some research, but a good lender – and I know several – can help you choose the loan that best fits your financial plan.
There are three main categories of loans available:
1. Fixed-rate loan or adjustable-rate loan
These are the most common loans in Oklahoma and across America. A fixed rate loan gets paid off over a set amount of time – usually 10, 15, 20 or 30 years – at a fixed interest rate. A 30-year loan is most common, although many buyers opt for a 15-year term. Once you are locked into a fixed-rate loan, interest rates might rise and fall, but your interest rate won’t change over the life of the loan. The only thing that might change your payment is changes in homeowner’s insurance cost, taxes, and possibly PMI.
Adjustable-rate mortgages (ARMs)
With an ARM you might start out with a lower interest rate, but it won’t stay at that rate. The interest rate will rise and fall depending on the market. If interest rates fall, your payment can drop. However if interest rates raise, your payment could easily go up – sometimes significantly. There are minimum and maximum rate caps that limit the size of the adjustment.
If you won’t be staying in your home long – say 5 years or less – or you plan to refinance in that time frame, an ARM might be a good option.
2. Conventional loan or government-backed loan
Any loan that is not backed by the government is a conventional loan. You will want to consider a government-backed loan, especially if you are a first-time home buyer, you have a low down payment, or you have less than stellar credit. Here are the government-backed loans that are generally available in Oklahoma:
Federal Housing Administration (FHA) loans
FHA loans are mortgages insured by the Federal Housing Administration. These loans are designed for borrowers who have less-than-perfect credit or can’t come up with a large down payment. They are very popular with first-time home buyers. You can get an FHA loan with as little as 3.5% down and a credit score of 580 or higher.
This flexibility doesn’t come free however. There are fees involved with FHA loans, which may make a conventional loan a better (and cheaper) option – if you can qualify. FHA requires an upfront mortgage insurance premium (MIP) as well as an annual mortgage insurance premium paid monthly. If you put less than 10% down, the insurance premium must be paid until you refinance the loan or it is paid in full. Conventional loans do not have an up-front mortgage insurance fee and the monthly mortgage insurance (PMI) premium drops off once your equity reaches 22%.
Veterans Administration (VA) loans
There is a zero-down loan available through the VA to veterans, active military and their families. The VA guarantees the loan to the lender, hence no mortgage insurance premium or PMI. VA loans also require no up-front money down. There are many benefits to VA loans and they are quite popular, but there are a few restrictions and an up-front VA funding fee that can be rolled into the mortgage. If you qualify, it is always a great idea to take a close look at a VA loan.
USDA loans are backed by the US Department of Agriculture (USDA) and are designed to help low or moderate income people buy, repair or renovate a home in rural areas. Some suburban areas in central Oklahoma qualify for USDA loans. If you qualify and the home qualifies, you can purchase a home with no down payment and get below-market mortgage rates.
Oklahoma is “Indian Country” and with over 35 tribes calling Oklahoma home, it has the highest concentration of Native Americans in the U.S. Over 1/4 of the people living in Oklahoma have some type of Indian heritage.
Because of this high concentration of Native American’s, the HUD Section 184K loan for Native Americans is attractive, yet is not well known in the mortgage community.
Similar to an FHA loan, the HUD 184K loan offers a very low minimum down payment of just 2.25%, and a much lower PMI which can significantly reduce your monthly payment.
3. Jumbo loan or conforming loan
The last thing to consider is whether you want a jumbo loan or a conforming loan.
A conforming loan is any loan that follows Fannie Mae or Freddie Mac’s guidelines, which include credit, income, asset requirements, and loan amount.
Loans that exceed these amount and/or requirements are called jumbo loans. They are also referred to as non-conforming mortgages. Most buyers utilize these loans for larger, more expensive properties that exceed the government limits. These loans also offer flexibility that conforming loans don’t offer, such as not always requiring PMI.
It is always a great idea to talk to a reliable lender prior to making a decision on the type of mortgage that works best for your situation. I have a number of local Oklahoma-based lenders I have worked with for many years that provide excellent service to my past clients and allow timely, trouble-fee closings on your home purchase. I have also worked extensively with one of the world’s largest VA lenders who can help military families get into a home quickly and cost effectively. And it is important to note that I do not receive any type of compensation from these lenders – in fact it is against federal law for a Realtor to receive compensation from a lender. My lender recommendations are based on past satisfied home buyers. Just ask and I can give you the names of several lenders that you can shop with for your next home mortgage.