How To Choose The Right Mortgage For You

Potential home buyers come from many different situations, so the financial industry gives them several types of mortgages that fit their specific needs. We will examine the types of mortgage loans that exist and what you need to qualify for these types of loans. Then, you can narrow down your choices to the best mortgage loan for you.

What Are the Types of Mortgages?

There are several types of mortgages to choose from, and one may be better for you than another. You may be able to apply for the following mortgages:

The Conventional Mortgage Loan

The conventional loan is more common than any of the other mortgage loans. It is a loan that you obtain for the purpose of buying a house that will be your primary residence. You apply for conventional mortgage loans with mortgage companies, credit unions and banks.

What Are the Qualifications for a Conventional Mortgage Loan?

You may have a fair credit score, but it would benefit you to have the highest credit score possible for this type of loan. In general, lenders require that you have a credit score equal to 620. However, they will offer you the lowest interest rate if you have the highest credit scores.

In addition to a moderate to high credit score, you must have the debt-to-income ratio that your lender requires. The debt-to-income ratio is the amount of your monthly debts compared to your monthly income. The best DTI ratios are between 36% and 43%. This means that you only spend 36% of your monthly income on your debts.

You must have at least 20% of the house’s purchase price to offer as a down payment. If you do not have that much money, the lender may approve your loan but will require you to have private mortgage insurance. When you have PMI, you must pay monthly premiums until you have accumulated 20% in equity.

The FHA Mortgage Loan

An FHA loan is a mortgage loan that the Federal Housing Administration insures. The FHA does not provide the funds for this loan. Private lenders do that, but they must be lenders that the FHA approves.

If you do not qualify for conventional mortgage loans, the FHA loan may be an option for you because it is easier for you to qualify for this type of loan. For example, you do not have to have the highest credit scores for an FHA loan. Your score may be as low as 580, and your down payment requirement would be as low as 3.5%. You can even qualify for an FHA loan with credit scores between 500 and 579. You will need to ensure that you can offer a down payment of at least 10% if you want to apply with the lowest credit scores.

The FHA loan is highly advantageous because of the looser qualifications. It is also a loan that the FHA guarantees, so it is a very safe loan for lenders. If you were to default on this loan, your lender would not bear the consequences of this. This loan also requires that you pay mortgage insurance, and the FHA will be the beneficiary.

The VA Mortgage Loan

The VA loan is a mortgage loan that the Department of Veterans Affairs guarantees. If you qualify, you can apply for a VA loan from a mortgage company, a credit union or a bank. This loan is even more advantageous than the last because you may not be required to make a down payment.

A very specific segment of the population qualifies for VA loans. This includes the following:

• U.S. Veterans
• Active-duty military personnel
• Some surviving spouses

Because the government guarantees VA loans, the Department of Veterans Affairs will pay a portion of your mortgage loan should you default. Because of this, lenders do not shoulder as much risk, so they will offer you more favorable terms on your loan.

These are also advantageous loans because they typically provide a lower interest rate. You may receive a fixed-interest loan, but you may also get an adjustable-rate mortgage. Private lenders offer VA loans, so they are free to require the credit score of their choosing when they apply for a mortgage loan.

The Interest-Only Mortgage Loan

An interest-only mortgage loan only requires that you make interest payments on the loan for the first couple of years. This is called the “interest-only period.” It is an advantageous loan because your monthly payments are lower. When the interest-only period is over, your payments will go up, but you can take a few actions to ensure that the payments are not so high that you will be unable to afford them.

For example, you may refinance your interest-only mortgage loan after the interest-only period is over. If you can qualify for a low interest rate, this option would be advantageous for you. If you have been able to save enough money to pay the loan in full because you made such low payments over the two-year period, you will be free to do so.

The Jumbo Mortgage Loan

When you would like to purchase a house that has a higher price tag than houses that qualify for a conventional mortgage loan, you must apply for a jumbo mortgage loan. In 2023, the maximum amount that you can qualify to borrow for a conventional loan is equal to $726,200 in the majority of the counties in the United States. You can apply for more money than this amount, but it would be a jumbo mortgage loan instead.

A jumbo loan is a “non-conforming” mortgage loan because Freddie Mac and Fannie Mae cannot guarantee these loans. Therefore, they are riskier loans for lenders because they do not have the protection of the U.S. government.

These loans also have stricter requirements, so not everyone can qualify for a jumbo mortgage loan. For example, you will need to have a credit score higher than 700 to qualify for a jumbo loan. If you cannot do this, you can apply for one of the more advantageous loans listed above.