What Type of Mortgage Is Best for You?
If you are thinking of buying a home in the near future, it is best to start planning your finances and researching your mortgage options as early as possible. Based on the amount you need to borrow, how much down payment you’re willing to make, your credit score, and your financial situation, the type of mortgage you need may differ. Here, we’ve discussed the pros and cons of different types of mortgages so that you can make the right choice.
Pros and Cons of Different Mortgage Types
Conventional mortgages are funded by private lenders such as banks and credit unions. Though they are not government-backed, they are still subject to the income and down payment guidelines set by Fannie Mae and Freddie Mac and the loan limits imposed by the FHFA.
Depending on the loan amount, debt-to-income ratio, and other factors, borrowers require a minimum credit score of 640 to qualify. In addition, you also need to make a down payment of 3% or more. You need a 20% down payment to avoid buying mortgage insurance.
Conventional mortgages can be either conforming or non-conforming loans.
Conforming Conventional Loans
As the name suggests, these loans don’t conform to the high-end lending limits put in place by the FHFA. As of 2022, the conforming loan limit for a single-family home is $647,200. In areas with higher-cost of living, homebuyers may be able to borrow up to $970,800.
Advantages of Conventional Loans
- They are flexible in purpose and can be used to buy primary residences, secondary homes, and investment properties.
- You can pay as little as a 3% down payment on loans backed by Fannie Mae and Fannie Mae.
- Overall borrowing costs are lower than other mortgage types, though interest rates are slightly higher.
Disadvantages of Conventional Loans
- You may need to buy mortgage insurance if you make a down payment of less than 20%
- They have stricter qualifications than government-backed loans.
When Should You Get a Conventional Loan?
If you have a strong credit score and can afford a downpayment of 10 to 20%, a conforming conventional loan is your best option. In fact, the 30-year, fixed-rate conventional mortgage is the most popular choice among homebuyers.
Non-conforming conventional loans are also called jumbo loans. They fall outside the lending limits set by the FHFA, making them an appropriate choice for funding more expensive luxury homes.
Jumbo loans are not guaranteed by any of the government-sponsored entities. In addition, more money means more risk for the lenders. So, the qualifying criteria for jumbo loans are very stringent.
Lenders prefer borrowers with a credit score of 720 or higher and will not even consider people with scores less than 600. Jumbo loans also have a higher down payment requirement—around 20% to 30%.
Advantages of Jumbo Mortgages
- It has higher lending limits so that you can look at more expensive homes in neighborhoods not defined as high-cost areas by the FHFA.
- Interest rates tend to be competitive with other conventional loans.
Disadvantages of Jumbo Mortgages
- There are higher asset requirements than conventional conforming loans.
- Jumbo loans have stricter qualifications than other conventional loans.
When Should You Get a Jumbo Loan?
If you are looking at homes that cost more than $510,400 or over $765,600 in high-cost areas, jumbo loans are your best bet. You also need to have enough money for a substantial down payment and a high credit score.
Government-insured loans help a wide range of mid to low-income American homebuyers make their dreams of homeownership a reality. As the qualification and down payment criteria are quite flexible, government-backed loans are an excellent option for first-time homebuyers.
Government-backed loans refer to mortgages issued by a private sector lender and insured by the government—the mortgage lender is protected against losses by the government if the homeowner fails to repay later on.
In the United States, there are three major government-backed mortgages, each guaranteed by a different government-sponsored agency.
Backed by the Federal Housing Administration, FHA loans help borrowers who don’t have a pristine credit history or enough money saved up for a sizeable down payment. The FHA will back a maximum of 96.5% financing if you have a minimum credit score of 580 and make a 3.5% down payment. However, you can get accepted with a score of 500 if you put down at least 10%.
- It has flexible credit and down payment requirements.
- The down payment can be as low as 3.5%
- The seller is allowed to contribute to closing costs.
- It can only be used to buy a primary residence.
- If you’re making a low down payment, you will be required to purchase mortgage insurance.
When Should You Get an FHA Loan?
If you can only afford a small down payment and don’t qualify for a conventional loan, you should choose FHA loans to finance your new home.
They are backed by The U.S. Department of Agriculture to help moderate to low-income borrowers buy homes in rural areas. The borrower must meet specific income limits to qualify. Additionally, these loans are only applicable to houses purchased in USDA-eligible areas.
- In some cases, eligible borrowers with low income don’t require a down payment.
- There is no minimum credit score to qualify.
- Extra fees include an upfront fee of 1% of the loan amount and an annual fee.
- It usually requires private mortgage insurance (PMI).
When Should You Get a USDA Loan?
If you are a low-income buyer with a poor credit history and interested in buying a house in one of the USDA-qualified areas, USDA loans are just what you need.
Insured by the Department of Veteran Affairs, VA loans do not require any down payment as long as the purchase price does not exceed the VA home loan limit. There is also no limit on the loan amount you can borrow, but there is a limit on how much the VA will guarantee. This may affect whether you will have to make a down payment.
Unlike other mortgages, VA loans don’t have any down payment (in some cases) or PMI requirements. The credit qualification is quite flexible.
If you are applying for VA loans, you will have to present a COE. Buyers who qualify are also required to talk to a mortgage officer at an institution that offers VA-backed loans.
As the name suggests, only veterans and those currently serving in the U.S. Military along with their family members qualify for a VA loan.
If you want to learn more about your home loan options, contact the mortgage professionals at Thrive Lending Group today!