Congratulations! You have found your dream home. Now it's time to choose the best type of mortgage loan for you. Learn about the different options.
After finding the house of your dreams and making an offer on it, your next step will involve working on your mortgage loan.
You'll need a loan to close on the house so this is something you'll want to start on right away.
But wait.
What type of loan should you apply for?
What is the best type of mortgage loan out there?
Will you even qualify for a loan?
These are all great questions to ask, and most first-time homebuyers have the same types of questions.
There are a lot of great types of mortgage loans to choose from, but let me explain four of the most popular types as well as some other factors to consider when choosing a mortgage.
Four Popular Types of Mortgage Loans
1. Conventional Loan
Conventional loans are very popular and are great for people with great credit, a decent-size down payment, and a stable job.
These loans have no government backing of any kind, so the lenders who issue them take on more risks when offering them. This results in stricter guidelines for qualifying.
There are no funding fees or premiums to pay with a conventional loan as long as you borrow less than 80% of the home's value. This means you'll need to put 20% down to avoid the private mortgage insurance (PMI) requirement.
If you have to pay PMI, you'll have an extra monthly expense to pay until you pay off enough of your loan to fall below the 80% mark in terms of equity.
2. VA Loan
A VA loan is a type of loan backed by the Department of Veterans Affairs. This is a great option for anyone who is currently serving in the military or has at some point in the past.
You do not need perfect credit to qualify for a VA loan, and you also do not need a lot of money for the down payment. In fact, you might qualify for a VA loan with no money down at all.
There is a funding fee you must pay and it is a one-time fee. The fee is typically 2.3% of the purchase price of the home. This percentage is based on no money down.
If you are able to put money down on the loan, the funding fee decreases. For example, if you put 5% down, the fee is only 1.65%. If you put more than 5% down, it might be less than this.
The good news is that you can roll the funding fee (and other closing costs) into your loan. If you don't have a lot of money for your down payment, this could work out great for you.
3. FHA Loan
An FHA loan is a loan backed by the Federal Housing Administration. FHA loans date back to 1934 and were created as a way of encouraging people to buy homes.
You will find a lot of great benefits with FHA loans. One, you don't need great credit. If you have a score of 580, you'll likely qualify for one. Two, you only need 3.5% down to qualify. If you have very little cash, this could be a good option for you.
There is no funding fee with an FHA loan, but there are two types of mortgage premiums you'll have to pay. One is an upfront cost (but can be rolled into the mortgage). The other is a monthly fee you'll have to pay for the lifetime of the loan.
4. USDA Loan
The U.S. Department of Agriculture backs USDA loans which means there's less risk for lenders, and these loans are ideal for people with low incomes, fair credit scores, and no money to put down.
There is a mortgage premium you must pay with a USDA loan but it is lower than the fees you'd pay with other loan types.
Which Type Is Right for You?
After reading through these descriptions, you might know which type seems best to you. Before making that call, though, you should talk to a mortgage lender to learn more about these options.
Other Factors to Consider When Choosing the Best Type of Mortgage Loan
In addition, there are a few other factors about mortgage loans that you should consider.
1. The Length of the Loan You Get
You might have options when it comes to choosing the length of your mortgage loan. The average length is 30 years but you could go with a shorter amount of time if you would like to.
If you choose a shorter period of time to repay your loan, your monthly payments will be higher but you will pay off your loan in a lot less time.
2. The Interest Rate
It's also wise to compare your loan options to find the type that offers the lowest interest rate. While the interest rate is not the only factor that affects your payment amount, it is a big factor.
Make sure you compare the interest rates on different loan types as well as the fees charged with each type of loan. By comparing both of these things, you can get a better idea which loan is more affordable.
3. The Money You Have Available for the Down Payment
It's very wise to make sure that you do not have to use all the cash you have on hand for your down payment. While you can use most of it, you should always make sure you have enough left in your emergency fund.
Every person who applies for a mortgage loan has a unique financial situation. That is why there is no one-size-fits-all loan type.
Get More Information
You probably understand more about mortgage loans now than you did before but you might still have questions.
If you're still wondering what the best type of mortgage loan is, check out our blog for more helpful articles about finances and mortgages.