The Most Common Mortgage Types
Even as someone who works in the financial field, I found myself house hunting unexpectedly this month (long story), and there were lots of terminology I didn't recognize. Understanding the many types of mortgages available was one of the most perplexing aspects of the home-buying process. I was about to make my decision after a lot of late nights spent researching the various sorts of mortgages available, but I'll hold that for the conclusion.
First and foremost. Are there several kinds of mortgages? Absolutely. But first, let's go over a few essential mortgage words that you should be familiar with before embarking on your own mortgage buying adventure. Understanding these terminology is critical since the variances between each form of mortgage loan are what distinguishes them.
- Interest rate/APR - An interest rate, also known as an annual percentage rate (APR), is the cost of borrowing money over the life of a mortgage loan.
- Closing expenses are fees that are added to the price of a house when it is purchased. They might be anything from 2% to 5% of the overall mortgage amount.
- A down payment is a set amount of money that you must pay beforehand to get a loan. It's often represented as a percentage of the house's overall cost.
- Qualifications - These are the many requirements that must be met in order to qualify for a certain loan. These include things like your financial history, the size of your mortgage, the location of your home, and any unusual personal situations.
- PMI/MIP - When you borrow money (a loan) and don't put down much money (a downpayment), you'll be charged a monthly insurance fee. MIP (Mortgage Insurance Premium) is a one-time payment, whereas PMI (Private Mortgage Insurance) is a monthly payment.
Now that we've cleared things up, let's look at the four most prevalent forms of mortgages accessible to today's homeowners.
FHA loans are popular among first-time homeowners because they are simple to qualify for (even with terrible credit), demand a small down payment (3.5 percent), and often have cheap closing expenses. The Federal Housing Administration (FHA) assists licensed lenders by insuring them against the risk of a default by the homeowner. Because the lender's risk has decreased, they may give you a better price.
Despite the fact that FHA loans are simple to qualify for, they do have certain drawbacks. Their interest rates can be higher, and you may be forced to pay mortgage insurance for the duration of the loan. Both of these additional charges add up to a significant increase in the total amount owed during the loan's tenure.
You must be 18 years old or older, have stable work, a debt-to-income ratio of no more than 43 percent, and intend to live in the home.
If you have a credit score of 580 or higher, you may put down as little as 3.5 percent. If your credit score is between 500 and 579, you will require 10%. One of the unusual features of FHA loans is that 100 percent of the downpayment can come from a friend or family member, as long as they match the FHA loan requirements. Downpayment aid programs such as SETH, TDHCA, and TSAHC are also available.
The amount of approval varies based on whatever county you live in.
FHA loan rates vary based on the county and market interest rates.
The Federal Housing Administration (FHA) demands both upfront and yearly mortgage insurance. (Remember, PMI and MIP are the same thing) for all borrowers, regardless of their down payment size. These extra charges are what can make an FHA loan more expensive throughout the life of the loan.
A Loan From The Veterans Administration
VA loans, like FHA loans, are guaranteed by a government agency: in this case, the Department of Veterans Affairs. Because the loan is guaranteed by the government, lenders are more likely to provide favorable terms, such as a low interest rate and no down payment. You must be a current or former soldier who served 90 days in a wartime or 181 days in a peacetime or 6-years in the National Guard to be eligible for a VA loan. You must also have acceptable credit to qualify for a $0 downpayment.
Understanding the concept of "entitlements" is crucial to comprehending VA loans. The amount of money the VA will guarantee to lenders if you default is known as an entitlement. In other words, it's the percentage of your mortgage that is backed by the VA. How much house you can afford is frequently determined by the size of your entitlement (lenders typically approve mortgages that are up to 4x the amount of the entitlement).
There are two categories of VA Loans: primary and secondary. The base allowance is $36,000, while the secondary allowance is $77,275. If you qualify for both, you will receive a total of $113,275.
You must have 90 days of wartime duty, 181 days of peacetime service, or 6 years of National Guard service to qualify for a loan. Lenders may also consider more traditional factors like as credit score, debt-to-income ratio, and work status.
Down payment: You can put as low as $0 down on a VA loan. You will need to make a down payment if the mortgage amount exceeds $453,100.
Approval amount: A number of elements influence how much you're accepted for, one of which is the amount of guarantee you're qualified for. In most cases, your approval amount will be four times your guarantee amount.
Loan rates are consistently lower than those for other forms of loans.
PMI isn't required with VA loans, but there is a 2.15 percent upfront financing cost.
Loan From The USDA
A USDA loan is another sort of mortgage loan that is ideal for low-to-moderate-income families that want to live in rural locations. Rural no longer entails living in the middle of nothing. Rural areas make up almost 97 percent of the country. You must be looking for home in a qualifying location and fulfill certain income standards to qualify for a USDA loan. If you're a first-time homeowner, you may be eligible for a $0 downpayment mortgage. When compared to an FHA loan, the USDA loan offers a lower PMI. However, there are geographical constraints on the amount of mortgage you may get accepted for. USDA stands for United States Department of Agriculture, by the way.
You (the borrower) must fulfill specific income standards, and the property must be located in one of the eligible locations. Depending on where you reside, you'll need a different amount of money. You must live in the house as your primary residence.
USDA loans do not demand a down payment, but you will still be responsible for closing fees. The expenses that a borrower must pay when purchasing a home are known as mortgage closing charges. They normally equal to 3-5 percent of the loan amount and are paid at closing (hence the name).
Approval amount: Each county has a set amount that can be approved. The limit in Fort Bend County, where I am writing this, is $210,800. The limit is $199,400 in Galveston County, which is south of here.
Rates on loans vary depending on your credit score and the provider.
USDA loans demand an upfront insurance premium (MIP) of 1% of the loan amount, followed by an annual payment (PMI) of 0.35 percent of the loan amount. Even so, the insurance expenses for a USDA loan are usually cheaper than those for an FHA loan.
A Traditional Loan
One of these items isn't the same as the others. So far, every loan we've mentioned has been backed by the government. Conventional loans, on the other hand, are not. Although agency-backed loans are simpler to qualify for, depending on your financial background, a conventional loan may be a better option. Depending on the sort of property you want to buy, you may need to consider a conventional loan. A typical mortgage loan can be utilized for a wide range of dwellings, including rental investment properties, but other loans have location or quality constraints.
One of the primary reasons conventional loans are better financial decisions is because, unlike FHA loans, your PMI goes away after you achieve 78 percent loan-to-value or put down 20%.
- Borrowers must have a minimum credit score of 620-640, verifiable income, and a maximum debt-to-income ratio of 43 percent to qualify for a loan.
- A down payment of 5% to 20% is required, with a portion of this amount being a gift. For conventional loans, there are no down payment aid schemes.
- Amount of approval: For a single-family house, the normal conventional loan maximum is $484,350. However, if you live in a designated high-cost region, this figure may be greater.
- Loan rates are mostly determined by your credit history and the loan's parameters. Some are fixed-rate, while others are variable-rate (often referred to as Adjustable Rate Mortgage or ARM).
- Insurance is only required until you have a 20% equity position. PMI is less expensive than on FHA loans.
My Experience With Mortgage Shopping
All of these forms of mortgages have advantages and disadvantages. Finding the best one for you is primarily determined by the answers to a few crucial questions:
- What is the state of your credit?
- What is your budget for a down payment?
- Is there a form of mortgage that you can't get because of where you wish to live?