If you are thinking about buying a house, understanding the mortgage industry and the many types of “products” is extremely important. Since it is likely you will be paying long-term, you are going to want to pick the best mortgage that meets your budget and needs. Not all mortgages are the same and depending on your situation, you might need to explore multiple options.
Here’s a quick synopsis of each of the most common types of mortgages available. There are many nuances and qualifications tied to each of these, and you will need to speak with a mortgage professional to find out which is right for you.
- Conventional Mortgage – This loan is not backed by the federal government. If you have good credit and can put down 3% then you can typically qualify for this loan backed by Freddie Mac or Fannie Mae. These are enterprises sponsored by the government. They sell and buy nearly all conventional mortgages nationwide. If you want to avoid needing private mortgage insurance (PMI) you’re going to need to make at least a 20% down payment. However, some lenders do offer these loans with a lower down payment and no need for PMI.
- VA Mortgage – This loan is specifically for veterans, service members, and military spouses. It requires zero percent down which is a great option for this select group. This means that 100% of the loan amount can be financed. You also get a cap on closing costs which is a major benefit. These loans are issued by private mortgage lenders and are always guaranteed by the U.S. Department of Veterans Affairs (VA). Keep in mind that this loan does require a funding fee to help offset taxpayer costs. You are not obligated to pay this funding fee if you have a service related disability and are a veteran receiving VA benefits, are a spouse of a veteran who part away in service, or are a veteran who would be entitled to receive VA benefits due to specifically a service related disability. You may also be able to opt out of paying funding fees if you are a veteran who did not receive active duty pay or any retirement.
- FHA Mortgage – FHA stands for Federal Housing Administration. This loan is great for first-time home buyers or those who have not saved enough for a large down payment. With an FHA loan, borrowers can finance homes with down payments as low as 3.5%. Down payments are able this low because of the fact that Federal Housing Administration loans are government-backed. The benefits of this loan include being able to pay your mortgage at any time without prepayment penalties, many term options with fixed rates, and the option for a five-year adjustable rate mortgage.
- Jumbo Mortgage – These loans surpass the loan servicing limitations put in place by Freddie Mac and Fannie Mae. This makes them non-conforming loans. In simpler terms, when a loan amount reaches a certain point, Jumbo Mortgages and Super Jumbo Loans can offer high-end financing that a traditional loan cannot. So, if you need to finance a high-end property that is too expensive for a conventional loan, this is a good option for you.
- Adjustable Rate Mortgage (ARM) – This loan is great if you have a low credit score. This mortgage typically offers interest rates lower than a fixed rate mortgage. Adjustable means that if overall interest rates rise, so will your monthly payment. Vice versa, if rates fall, your payment will decrease too.
- USDA Mortgage – This loan is great if you are struggling financially and live in a rural area. It is a government sponsored loan. With this loan, the government can finance 100 percent of the home cost. This only goes for USDA eligible homes. Benefits include no down payment needed and better interest rates.
While you might be thinking that one of these loan options sounds like the perfect fit for your situation, depending on the loan type, there are many qualification requirements you will need to navigate. An experienced and informed loan officer will be able to help you identify the best loan option for you.
In some cases, your personal preference might be another factor that could impact your loan choice. After all, you have choices to make on how you want to structure your mortgage and pay it off. From terms and loan length, to down payments and loan size, these factors will impact your options as it relates to your mortgage.
At the end of the day, your mortgage company should be guiding you towards the best, most financially responsible choice available to you. Make sure you are working with a reputable mortgage company as you navigate this important life event.