What type of mortgage loan is best?

Before venturing out to buy a home, you may think that a mortgage is just paperwork: you go to the bank, they decide whether to give you a loan, and once you are approved, you start making payments. Then, you discover that there are many types of home loans offered by lenders, each with its own lending criteria, restrictions, benefits, and drawbacks.

To determine which type of home loan is best for you, you'll need to consider your credit score, how much you can put down for a down payment, how big a loan you need, and how quickly you want to pay it off, among other factors.

Is a conventional loan right for me?

A conventional loan is the most common type of mortgage and the one that usually comes to mind when you think about a home loan. They are offered by almost all mortgage lenders. Unlike Federal Housing Administration (FHA) or Veteran Affairs (VA) loans, conventional loans are not backed by the government.

What to consider when getting a conventional home loan

Conventional loan are ideal for borrowers who have a stable income and documented employment history. You generally can't get a conventional loan if you have a credit score below 620. Lenders also look at your debt-to-income (DTI) ratio and, if more than 36% of your monthly income go toward debt payments, you may not be approved.

Conventional loans used to require a 20% down payment, but many lenders now allow less if the borrower has good credit and a solid income. Technically, the down payment can be as low as 3% on a conventional loan, but if you don't make a down payment of at least 20%, you'll have to pay for private mortgage insurance (PMI) until the balance is paid off. of the mortgage is 80% or less of the value of the home. You may also have to pay a higher interest rate if you make a low down payment. Paying the monthly PMI and a higher interest rate will increase the overall cost of your mortgage, so you need to weigh whether a lower down payment is worth it.

Is a government-insured mortgage the right choice?

Some types of government-backed loans have more lenient lending criteria than conventional loans. The main ones you'll see are FHA, USDA, and VA loans.

Federal Housing Administration (FHA) Loans

FHA loans are backed by the Federal Housing Administration and are intended to help first-time homebuyers who don't qualify for a conventional loan. Loan criteria are more flexible with fewer credit scores and income requirements. Your down payment can be as low as 3.5%, but unlike a conventional mortgage, you may have to pay for mortgage insurance while the loan is in force. Interest rates on FHA loans are often a bit higher than conventional loans, since lending standards are less stringent.

United States Department of Agriculture (USDA) Loans

The US Department of Agriculture offers mortgage loans to low- and moderate-income homebuyers in eligible rural areas. The USDA has a direct loan program just for low-income Americans, with extremely low interest rates and no down payment. It also offers a guarantee program where it backs up loans made by local lenders (similar to a VA or FHA loan). These loans allow zero down payment and offer low rates, but you may have to pay for mortgage insurance.

Loans from the Department of Veterans Affairs (VA)

A VA loan is backed by the Department of Veterans Affairs and is a home loan specifically for members, former members of the military, and eligible family members. These home loans allow zero down payment without private mortgage insurance, and interest rates are generally lower than conventional loans. To qualify, you must provide proof of stable income that shows you can repay the loan and you must obtain a VA Certificate of Eligibility.

What to consider when getting a government-insured home loan

If you don't qualify for a conventional loan, or if your priority is getting a loan with the lowest possible down payment, government-insured loans can be a great option. They are ideal for eligible borrowers with little cash savings.

Government-insured loans are also a good option for homebuyers with bad credit. An FHA loan allows credit scores of 580 or higher with a 3.5% down payment and sometimes allows credit scores as low as 500 with a 10% or higher down payment. While VA loans don't have an official minimum credit score, most lenders require a score around 620. USDA loans typically require a score of 640 or higher, and you can't earn more than a certain amount. (depending on your location).

Keep in mind that not all lenders offer government-backed loans. You will need to research local and online lenders to find ones that offer these loans and compare rates before settling on one.

Should I get a fixed rate loan or an adjustable rate mortgage?

There are two types of interest rates for mortgages: the fixed rate and the adjustable rate. Fixed-rate mortgages have one interest rate and one payment amount over the life of the loan.

Adjustable-rate mortgages (ARMs), on the other hand, have an introductory period in which the interest rate stays the same and is often less than an average annual percentage rate (APR). fixed. However, after a predetermined period, it becomes variable. For example, with a 5/1 ARM, the interest rate would be locked in for the first five years and then adjusted each year thereafter. The rate adjusts according to market conditions, so it could go up or down. There are limits to how much you can raise, but you can make your monthly payment unpredictable.

This is an easy way to find out what type of interest rate is best for you. If you're going to be in your home for the long term, a fixed-rate mortgage is often better, as it provides predictability for decades. However, if you plan to stay in the home for only a few years, an ARM could save you money if you move before the adjustment period hits, since the introductory rate is often lower than a typical fixed-rate mortgage.

Should I choose a 30-year or a 15-year mortgage?

Mortgages generally give you several different term options, but the two most common you'll find are 30-year and 15-year. There are some important things to know when choosing your term.

First, the shorter your term, the higher your monthly payment will be because you have less time to pay off the loan. A big plus, though, is that it also means you'll pay less interest over the life of the loan, since you're paying off the debt faster, sometimes tens of thousands of dollars less. Also, interest rates are lower on short-term loans.

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