When first thinking about buying a home, the type of mortgage you should consider is a bit lower on the priority bar. The first decision is whether or not to buy the home in the first place. Once that decision is made, it’s time to get your preapproval letter from your mortgage company. Most agents today won’t even let you into their car without having first spoken with a lender. Further, when making offers, the sellers and the seller’s agent want to see that not only have you spoken with a lender but have been preapproved, meaning your income, credit and assets have been reviewed and verified. Next, you’ll need to find out which mortgage is best for your situation.
You might be surprised at the various options available when financing a home. You’ll need to decide if you want a fixed rate loan or a variable one. You will also need to select a loan term. The most popular loan term is 30 years but there are certainly others. Your loan officer will help you with this. Your loan officer will also review your situation and provide different options from which to choose. In general, though, there are some factors to consider when selecting the type of mortgage which is right for you.
The most popular mortgage is the standard conforming conventional loan. When you see 30 year mortgage rates advertised, it’s very likely the lender is referring to this type of loan. Most every single lender offers this product creating a more competitive arena. Lenders will compete on rates and terms but also service. The service portion is extremely important but often not considered. A mortgage company might offer the lowest rates on the planet but after you submit an application you can’t get a return phone call. You want competitive terms but also stellar customer service.
Regarding the loan term, just remember the longer the term of the loan the lower the monthly payment but you’ll pay more in interest over time. A shorter loan term will result in higher monthly payments, but less interest is paid over the life of the loan. Speak to your loan officer and see what your principal balance would be five years into the loan with a 30 year term compared to a 15 year. You might be surprised.
Are you VA eligible? VA loans are the ideal choice for those who are eligible. VA loans do not require any sort of down payment, the buyers are limited from paying certain types of closing costs and rates are extremely competitive. In addition, there is no monthly mortgage payment required compared to other low-down payment mortgages. If you’ve served in the Armed Forces, active duty or served in the National Guard or Armed Forces Reserves this is probably the ideal choice for those wanting to come to the settlement table with as little cash as possible while still getting a very competitive program. VA loans also come with a government-backed guarantee should the loan every go into default.
FHA loans are another option. FHA loans are very popular with first time buyers because the minimum down payment is just 3.5% of the sales price. FHA loans also have a government-backed guarantee. These guarantees make it a bit easier to qualify as lenders are compensated for any loss should the loan default.
If you’re buying in a rural area and also want to come to the settlement table with as little cash as possible, the USDA program is likely your choice. USDA loans also a zero-down option. Many loan programs don’t like financing a home in a rural area as there are very few recent sales of similar homes in the area.
As you can tell, there are probably more choices than first imagined. But don’t let that confuse you. Your loan officer will help decide which program best fits your financing requirements.