In determining what type of mortgage loan is best for you, it is wise to know which mortgage loans are available to you. First, know that the type of loan and the type of mortgage is different. Sound advice is to know your financial situation and what mortgage loan/program you are qualified for.
In today’s market, there are several types of loans and mortgages. Your approval will depend on your financial status, the amount of money you have available for a down payment, your credit history, and even your military history (if applicable).
The following information describes the most common types of LOANS, as well as advice about their key features and restrictions:
FHA mortgage loans require a minimum 3.5% down payment (96.5% of either the purchase price or appraised value, whichever is lower). As a bit of mortgage advice, note that there are maximum loan limits which generally vary according to state, metropolitan area, and/or county, as well as type of dwelling. FHA loans require debt-to-income ratios of 31% (front-end ratio) and 43% (back-end ratio), and a credit score of 620 or higher. For additional advice, see the U.S. Department of Housing and Urban Development (HUD) website, or the Federal Housing Administration (FHA) homepage.
VA loans are available to veterans and armed services members, as well as their qualifying widows/widowers. VA loans require no down payment and the loan amount may be up to $417,000 (varies by city/state). As a piece of mortgage advice, keep in mind that the seller may pay up to 4% of closing costs, and your front-end debt-to-income ratio cannot exceed 41%.
USDA (Rural) Loan (Guaranteed & Direct)
The USDA loan is available for home purchases outside metropolitan areas (not just for farmers). USDA Guaranteed loans are designed for borrowers with income levels up to 115% of median household income and may not require a down payment. USDA Direct loans are for borrowers with income levels between 50-80% of median household income. As a bit of mortgage advice, note that USDA loans do not require monthly mortgage insurance, although you will need a 29% front-end debt-to-income ratio and a 41% back-end debt-to-income ratio, as well as credit score of 620 or higher.
Conventional mortgage loans usually require a minimum 5%-20% down payment, a 36% front-end ratio, and a 28% back-end ratio. As general mortgage advice, conventional loans do not have loan amount limits, and they usually come with lower mortgage insurance charges than government-backed loans. Conventional loans may require a stronger credit score (720 or higher for good interest rates) and are more stringent on borrowers with a bankruptcy in their credit history (4 years) than either the FHA or VA (2 years each).
The following information describes the most common types of MORTGAGES, as well as advice about their key features and restrictions:
With a fixed-rate mortgage, your interest and mortgage payments remain “fixed” throughout the life of the loan (typical loan life is 15 or 30 years). Payments are higher on a 15-year loan, but if you can afford it, your mortgage will be paid off twice as quickly and you’ll save more than half the interest costs! As an additional piece of mortgage advice, you may have the option to repay a 30-year loan on a bi-weekly basis (rather than once a month), which can save you time and money.
This is a short-term fixed mortgage. At the end of a balloon mortgage, the borrower must pay the remaining balance in a lump sum or refinance their loan. A common application for the balloon mortgage is when a homebuyer purchases unimproved property that he/she plans to build on within 5 to 7 years.
Adjustable-Rate Mortgage (ARM)
The interest rate on an adjustable-rate mortgage fluctuates during the entire life of the loan. Your interest rate is modified based on a predetermined economic index and a set margin, both established at the onset of the loan. Additionally, a cap is usually implemented to prevent enormous increases in the interest rate. Most mortgage advice will tell you to only get an ARM if you’re confident that your budget can handle the fluctuating payments.
Within the adjustable-rate mortgage family, there are several different variations. This includes the payment-option ARM, which provides the borrower with payment alternatives to accommodate fluctuating cash flow ― these include minimum payment options and interest-only payment options, among others. As a bit of mortgage advice, it is wise to thoroughly understand these types of loans because you will need to be prepared for a possible sudden increase (payment shock).