If you’re planning to buy a house soon but don’t have enough funds, finding the right mortgage can be tough. Navigating mortgage lending can feel overwhelming at first, but since a home is likely the biggest purchase you’ll ever make, it’s crucial to do thorough research beforehand.
The big question is: where do you start? There are many things to consider: how to get the best interest rate, whether private mortgage insurance (PMI) is required, how it works if you have a small down payment, and which type of mortgage is right for you.
Before diving into the real estate market, it’s essential to understand the different mortgage options available. Going into a meeting with your loan officer with some basic knowledge about various mortgage types can make the process smoother and less intimidating.
Here are some insights to get you started:
**FOUR ESSENTIAL TYPES OF MORTGAGES**
There are many mortgage options, but generally, they fall into two main categories: conventional and government loans.
**Conventional Mortgages:** These are the primary conforming loans.
**Government Loans:** These include FHA, VA, and USDA/Rural Development (RD) loans, which come with government backing.
Choosing the best loan depends on your financial situation, credit score, down payment ability, and whether you need mortgage insurance.
**Conventional Mortgage Loan**
Conventional mortgage loans are often a great choice for eligible borrowers. You might only need to put down as little as 3%, but to avoid PMI, you’ll need at least a 20% down payment.
These loans usually offer attractive interest rates because they require higher credit scores, which lowers the risk for lenders. If you can’t put down 20% and need to pay PMI, the PMI for conventional mortgages is relatively low and depends on the PMI company your lender uses.
Conventional loans are often the best fit if you qualify, but if you don’t, government-backed mortgages like VA, USDA/RD, or FHA loans are good alternatives.
**Veteran’s Administration (VA) Loan**
VA loans are designed for veterans and the spouses of deceased veterans. If this applies to you, a VA loan might be a good option, especially if your credit isn’t great. You can finance the entire home purchase, which is helpful if you don’t have funds for a down payment.
**USDA/Rural Development (RD) Loan**
If you’re not a veteran and don’t have a down payment, you might qualify for a USDA or Rural Development loan. These are government-backed loans for properties located outside major cities.
**Federal Housing Administration (FHA) Mortgage Loan**
FHA loans used to be popular for those without large down payments or excellent credit scores, with a down payment as low as 3.5%. However, these loans are now less desirable due to their high monthly mortgage insurance fee of 0.85% for a 30-year mortgage.
**Fixed Rate vs. Adjustable Rate**
After choosing a loan type, you’ll need to decide between a fixed-rate mortgage and an adjustable-rate mortgage (ARM).
**Adjustable Rate Mortgages (ARMs):** These are risky because the rate can change over time. You may need to sell the home, refinance to a fixed rate later, or pay off the mortgage early, none of which are guaranteed options.
**Fixed Rate Mortgages:** These are safer and more common. Once you lock in your rate with your loan officer, it won’t change until the loan is fully paid off.
**What’s the Best Mortgage Loan for You?**
Your choice should mainly depend on your credit score and down payment capacity. If you have excellent credit and can put down at least 3%, a conventional mortgage is usually the most affordable option. If you have mediocre credit or a low down payment, a VA or USDA loan might be a better fit. If those options aren’t viable, consider an FHA loan.
In conclusion, once you’ve decided on the best loan type for your needs, schedule a meeting with a loan officer to get qualified and have your credit evaluated. Being well-prepared will impress your loan officer. After approval, you’ll start looking for a Realtor, and that’s where the real excitement begins.
Good luck finding your dream home!