How to choose the best mortgage loan for you
The first question prospective homebuyers often ask us is, “What is the best mortgage loan?” The answer? It depends. The needs and expectations of all homebuyers are different. The ideal mortgage loan for you may not be the right fit for your friends, family or your next door neighbor.
For the best loan to fit your life, talk to an expert loan officer before you go home shopping. However, first, it helps to do some homework and learn the lingo on the types of mortgages available.
Mortgage 101: Eight basic types of loans
- Conforming loan
For a mortgage loan to be conforming, it must meet the requirements set by the Federal Housing Finance Agency (FHFA) and the funding criteria of Freddie Mac and Fannie Mae. In many cases, Conforming loans offer low interest rates to borrowers with excellent credit scores. Who should get a Conforming loan?
- Homebuyers with good credit and a qualifying debt-to-income ratio
- Borrowers who do not need more than their county loan limits
- Federal Housing Administration (FHA) loan
A government loan insured by the FHA and issued by an FHA approved lender. FHA loans offer options with lower minimum down payments and credit scores and are designed for low-to-moderate income borrowers. While these loans are popular with first-time homebuyers, they are available to anyone who qualifies. Who qualifies for FHA loans?
- Homebuyers with lower credit scores
- Individuals with low-to moderate-incomes
- Borrowers who can afford down payments as low as 3.5%
- United States Department of Agriculture (USDA) loan
Also known as the USDA Rural Development Guaranteed Housing Loan Program, this government-insured program is offered to rural property owners. Who can qualify for a USDA loan?
- Anyone who lives in or will purchase in areas defined by the USDA as rural
- Households with a low-to-moderate income for their area
- First-time and repeat homebuyers
- Department of Veterans Affairs (VA) loan
Another type of government-insured mortgage loan, a VA loan is created specifically for eligible military veterans, service members and their spouses. It offers considerable benefits and is issued through private lenders, but is guaranteed by the Department of Veterans Affairs, making it a very beneficial program for those who qualify. According to realtor.com, VA loans offer attractive interest rates and the opportunity to purchase a home with zero down payment. Who is eligible to apply for a VA loan?
- Most veterans, active military, reservists and National Guard
- Spouses of military members who died while on active duty or suffered a service-connected disability
- Jumbo loan
A loan typically used by borrowers looking for larger loan amounts. Unlike Conforming loans, Jumbo mortgages exceed the limits set by the FHFA, which means they are great options for borrowers with a strong financial situation looking to buy a more expensive home. Who should get a Jumbo mortgage?
- Homebuyers who want to buy a property exceeding county loan limits
- Individuals with strong credit scores and income documentation
- Borrowers who have funds for at least a 5% down payment
- Expanded loan
Also known as a Non-Qualified (Non-QM) mortgage, an Expanded loan is an out-of-the-box alternative designed for those looking for financing flexibility. When other loans aren’t meeting your needs, an Expanded loan can bridge the gap. Who is eligible for an Expanded loan?
- Professionals with stock options on a future vesting schedule
- Retired individuals using social security, pension or investments as income
- Doctors, dental surgeons and veterinarians
- Amazon employees with a signing bonus, stock options or salary
- Self-employed individuals
- Anyone with a lower credit score and fewer cash reserves
- Fixed-rate loan
Having a fixed-rate means the interest rate is locked up-front for the entire term of the loan, allowing borrowers to predict their future payments accurately. Loan lengths vary, but the most common term is 30 years. Who should get a fixed-rate mortgage?
- People seeking the predictability of a fixed payment
- Anyone planning to keep their home for ten years or more
- Homebuyers with adequate credit
- Adjustable-rate loan
Better known as an “ARM,” this is a home loan with an interest rate that can change periodically. An ARM starts with an introductory fixed interest rate from 3-10 years, then adjusts after the initial fixed interest rate period ends. Meaning your monthly payments will go up or down when interest rates fluctuate. Learn more about the difference between an ARM and fixed-rate loan? Who should get an adjustable-rate mortgage?
- Homebuyers planning to move or refinance in 5-10 years
- Anyone interested in a lower initial payment and comfortable with future rate adjustments, up or down
Extra credit question
Ask yourself this bonus question to help guide your loan selection: What loan term is best for me? An essential step in determining what mortgage type to choose is to decide how long you want to repay the loan. When comparing term options, the Consumer Financial Protection Bureau explains, “In general, the longer your loan term, the more interest you will pay. Loans with shorter terms usually have lower interest costs but higher monthly payments than loans with longer terms.”2
Now that you’ve done your homework, it’s time to connect with an experienced residential loan officer in your community who will match you with the ideal loan for your financial situation and homebuying needs.
The above information is for educational purposes only. All information, loan programs & interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply.