Which Mortgage is Right for You?

Written by Posted On Thursday, 16 August 2018 09:17
Which Mortgage is Right for You? Carthage Savings

5.51 million homes were purchased in 2017. The majority of these homes were financed, meaning that the home buyers borrowed a portion or the entirety of the asking price.

Conventional mortgages give nearly all prospective homebuyers an opportunity to invest in the property of their dreams; such financing exists because the average home hunter does not have $300,000 or more in cash in her pocket, particularly homebuyers of younger generations.

Yet if you are on the precipice of purchasing your first home, you may be surprised to hear that there are different kinds of home loans available to homebuyers. While a conventional mortgage is ideal for a large portion of homebuyers, there are other options for purchasing a property.

In fact, identifying which mortgage is right for you should be one of the first steps you take in the home buying process. That, and choosing a real estate agent who is most likely to make your purchase a memorable, positive experience. (Read more about that here.)

In this post, I’ll discuss the types of home loans available to home buyers. Keep in mind that many mortgage alternatives do have specific eligibility requirements for applicants and that you may not qualify for all of them given your income level, region, and financial history.

The Conventional Home Loan

Most homebuyers opt to finance their new home with a conventional mortgage, a home loan provided by non-government lenders. There are scores of conventional home loan lenders out there, both local and national.

All of these lenders are likely to vary in terms of customer service, mortgage terms, and rates. For this reason, it’s vital to research lenders as extensively as you research real estate agents.

A conventional mortgage differs from federally guaranteed mortgages in that its requirements for down payments are generally fairly lax, in some cases only requiring homebuyers to put down a minimum of 3% of the asking price. However, in many cases, a conventional home loan requires borrowers to take out mortgage insurance, which can be costly.

However, homebuyers who put down at least 20% of the asking price do not have to purchase mortgage insurance.

Conventional home loans do have closing costs, in some cases higher than those acquired through government home loans; they also are likely to have a minimum credit score rating required for all applicants. The higher the credit score you have, the greater your odds are of securing a manageable interest rate.

In general, conventional home loans are available in 15, 20, and 30-year terms. The length of term you select will depend on your current financial standing, plans for the future, and the lender itself.

In most cases, your conventional home loan will be a conforming loan, meaning that it meets the stipulations of Fannie Mae or Freddie Mac, the agencies that guarantee most mortgages. Non-conforming or jumbo loans apply to mortgages of higher amounts.

Rural Housing Loan

USDA or Rural Housing Loans are available to rural residents via the United States Department of Agriculture. This program provides special financing for residents of specific rural areas who fit a certain income bracket and may struggle to qualify for a conventional mortgage.

To qualify for a rural housing loan, you do have to live in a designated rural area of specific state counties, and you have to meet rather strict income requirements. However, a lot of prospective homebuyers who are uncertain of their capacity to finance a home or property in rural districts often overlook this option.

Find out if you are eligible for a USDA housing loan here.

VA Loan

VA loans are mortgage loans for veterans. They are guaranteed by the federal government (the U.S. Department of Veteran Affairs) and an option only for military service members and families.

These home loans are the most generous of mortgages available, requiring 0% down payments for home purchases. Terms and rates are generally relatively comfortable, but eligibility requirements can be stringent. In fact, the loan benefits you are entitled to as a veteran or military service member will depend on the “nature, length, and character of your service.”

Learn more about whether or not you qualify for a VA loan here.

Only select federally-approved lenders will offer VA loans, so if you decide that a VA loan is right for you, be sure that your lender offers this type of home loan prior to getting pre-approved.

FHA Loans

An FHA loan is another government-guaranteed mortgage provided through the Federal Housing Administration. While FHA loans provide lower interest rates, in general, than conventional loans, they do require all borrowers to take out mortgage insurance.

This is because the minimum credit score requirement for applicants of an FHA loan is 500. Given the fact that lower-credit borrowers are deemed “high-risk,” the mortgage insurance protects lenders from loss in case of default. The minimum down payment is also 3.5% of the asking price.

FHA loans are an ideal solution for prospective homebuyers who are wary of stricter eligibility requirements for conventional home loans. These loans tend to also be more forgiving if you struggle to make mortgage payments once the loan is actually secured.

Additionally, if you take out an FHA loan, you can also finance home repairs down the road if needs arise.

Learn more about your eligibility for an FHA loan here. Just like VA loans, only select lenders provide FHA loans to applicants.

Other Considerations

Prospective borrowers have the option to choose adjustable or fixed-rate home loans. An adjustable home loan is one that will not adhere to the same interest rate over the entire length of the loan.

If you take out an ARM, you likely won’t be paying the same exact mortgage payment every month. Payments will fluctuate with interest rates, which tend to be lower at the beginning of your mortgage.

A fixed rate mortgage, on the other hand, is exactly what it sounds like: you can expect to pay mortgage payments at the same interest rate for the extent of your home loan.

In many cases, eligibility alone may determine the mortgage that is right for you. Yet it may also be wise to consult a financial advisor or prospective lender to make the decision best for your financial needs.

Good luck!

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Kate King

Kate King is a freelance writer, editor, and blogger. 

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