Securing a mortgage is a pivotal step toward owning a home, making it essential to understand the range of mortgage loan options available. For me, learning back in 2019 that if my new home was my primary residence, I only needed to put down 5% was a complete game changer, enabling me to purchase earlier than I thought possible. Now, as I look to grow my investment portfolio, construction loans are my focus, since they will allow me to finance the renovation and purchase of the property all in one loan.
There are a variety of mortgage loan options, each catering to different financial circumstances and preferences. Qualifications, loan limits, and other factors can change annually. Here are some fundamental mortgage types to consider, along with some eligibility information and loan limits for 2024.
As always, this is a very high-level overview. For a comprehensive overview and individualized advice, please consult with a loan officer.
1. Conventional Fixed-Rate Mortgages
These mortgages offer stability with a fixed interest rate throughout the loan term. They’re ideal for those seeking predictability in monthly payments and who plan to stay in their homes for an extended period. With a fixed-rate mortgage, it is common to put anywhere from 5%-20% down. At the end of 2023, the lending guidelines were updated to allow purchasers to put only 5% down on up to a 4-unit property using a conventional mortgage if it is owner-occupied!
(Read more about 5% down conventional loan options and requirements here!)
Conventional Loan Limits for 2024:
Single Family: $766,560
2 units: $981,500
3 units: $1,186,350
4 units: $1,474,400
2. Conventional Adjustable-Rate Mortgages (ARMs)
ARMs start with a fixed interest rate for a specified period before transitioning to a rate that fluctuates with market conditions. They often have lower initial rates but carry the risk of increasing monthly payments due to increasing interest rates over time. Same loan limits as above.
3. Government-Backed Loans
These loans are insured by government agencies like the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). They often offer more flexible eligibility criteria and lower down payment requirements, which makes them an excellent option for individuals who do not meet conventional mortgage eligibility standards. FHA loans offer as little as 3.5% down (but PMI for the life of the loan), and the home must be owner-occupied. VA loans offer 0% down (with no PMI!) and you can use both FHA or VA loans to purchase multi-family properties but one of the units must be owner occupied.
FHA 2024 Loan Limits (in Twin Cities MN Metro area, outside of metro limits may be lower)
One Unit: $515,200
Two Units: $659,550
Three Units: $797,250
Four Units: $990,800
VA 2024 Loan Limits: Same as conventional loan limits above.
4. Construction Loans
Construction mortgage loans are specialized financing options designed to fund the construction or renovation of a property. They provide funds in stages or “draws” as the project progresses, typically covering land purchase, construction costs, and sometimes even long-term financing after the construction is complete. These loans often have variable interest rates during the construction phase and then convert to a permanent mortgage with a fixed or adjustable rate once the project finishes. They’re tailored for individuals or companies undertaking building projects, offering financial flexibility and tailored disbursements to align with the construction timeline.
5. Jumbo Loans
Jumbo loans are used for high-value properties that exceed conventional loan limits (see above). They typically have stricter requirements and higher interest rates due to their larger amounts.
6. Down Payment Assistance Options
While not technically a mortgage loan, these programs can make home ownership more accessible through covering all or part of a buyer’s down payment and closing costs needed to secure a mortgage. Minnesota has down payment assistance options through the Minnesota Housing Finance Agency (MHFA) and at the county and city level. Depending on the program, the eligibility requirements, interest rate, length of loan, and interest rate vary.
Factors Influencing Mortgage Choice
When deciding on a mortgage, consider these factors:
- Interest Rates: Fixed or adjustable rates, impacting long-term affordability.
- Loan Term: The duration of the loan, affecting monthly payments and overall interest paid.
- Down Payment: The initial amount paid upfront, influencing loan size, monthly payment and potential fees.
- Credit Score: Affects eligibility and interest rates offered by lenders.
- Closing Costs and Fees: Additional expenses associated with securing the loan, which will vary by lender.
Securing the right mortgage is a critical step in the homeownership journey. By understanding the nuances of each mortgage type, assessing your financial capabilities, and considering long-term objectives, you can plan for the purchase of your home or investment property. Or decide that you are ready to buy now!
xx,
Claire
