Published: February 27, 2018
With this super-simple breakdown of loan types, you won’t get overwhelmed — you’ll find the right mortgage.
When it comes to buying a house, most people know what they prefer: a bungalow or a condo, a hot neighborhood or a sleepy street.
Mortgages, too, come in many styles — and recognizing which type you should choose is just slightly more involved than, say, knowing that you prefer hardwood floors over wall-to-wall carpeting.
First things first: To pick the best loan for your situation, you need to know what your situation is, exactly. Will you be staying in this home for years? Decades? Are you feeling financially comfortable? Are you anxious about changing loan rates? Consider these questions and your answers before you start talking to lenders. (And before you choose a lender, read this.)
Next: You’ll want to have an understanding of the different loans that are out there. There are lots of options, and it can get a little complicated — but you got this. Here we go.
Let’s start with the most common type of mortgage, that workhorse of home loans — the fixed-rate mortgage.
A fixed-rate mortgage:
It’s ideal when: You want long-term stability and plan to stay put.
Here’s what else you need to know about fixed-rate mortgages:
Now let’s get into adjustable-rate, the other type of mortgage you’ll be looking at.
An adjustable-rate mortgage (ARM):
It’s ideal when: You plan to live in a home for a short time or you expect your income to go up to offset potentially higher future rates.
Here’s what else you need to know about adjustable-rate mortgages:
A general rule of thumb: When comparing adjustable-rate loans, ask the prospective lender to calculate the highest payment you may ever have to make. You don’t want any surprises.
Which fixed-rate or adjustable-rate mortgage you qualify for introduces a whole host of other categories, and they fall under two umbrellas: conventional loans and government loans.
Who qualifies? Typically, you need at least a credit score of 620 or above and a 5% down payment to qualify for a conventional loan.
Here’s what else you need to know about conventional loans:
Fannie Mae and Freddie Mac set limits on how much money you can borrow for a conventional loan. A home loan that conforms to these limits is called a conforming loan:
A home loan that exceeds these limits is called a jumbo loan:
There are practical considerations to take into account before getting a jumbo loan too, mainly: Are you comfortable carrying that much debt? The answer depends on your current financial situation and long-term financial goals.
Who qualifies? That depends on which government loan you’re looking at.
If you’ve had trouble qualifying for a mortgage because of income limitations or credit:
FHA loans are used by a broad swath of people, including those with lower credit scores and income.
Also, a heads-up — the date an FHA loan was issued affects the MIP.
If you’re in the military, a veteran, or a veteran’s spouse:
VA loans also don’t charge borrowers mortgage insurance — potentially helping you save a significant chunk of cash on your monthly payment.
Given the benefits, a VA loan is often the best mortgage option for people who qualify.
If your income is limited and you live in a small or rural town:
USDA loans are mortgages for limited-income home buyers in towns with populations of 10,000 or less, or that are “rural in character,” meaning that some areas that now have bigger populations are grandfathered in. You can see whether your town is eligible on the USDA’s website.
Only a select number of lenders offer USDA loans; here’s a list of USDA-approved lenders nationwide.
If your job is to help people:
Niche programs, like the Neighbor Next Door from HUD, allows teachers, law enforcement officers, first responders, and government workers — as much as 50% — on eligible homes in revitalization districts.
Note: Downpayment assistance programs offer qualified buyers such things as grants and interest-free loans. Start with your state’s housing finance agency to find options.
Speaking of your lender: Ultimately, you’ll be working with your loan officer or broker to narrow down these choices, and to find a loan that works for you and your finances. (Just another reason why it’s important to choose a lender you’re comfortable with.)
Your real estate agent should be able to offer some insight, too. And because they don’t earn a paycheck from your loan selection, their advice about mortgages should be impartial.
You know your stuff. And you know whom to ask for help. Who’s overwhelmed? Not you.
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