How to Choose the Best Mortgage for Your Situation
“What's the best mortgage type for me?” That is a daunting question that many of us will ask (or have already asked) ourselves. Yet, it is so important to make sure you ask it.
A mortgage is simply a loan that consists of two parts: principal and interest. Principal refers to the base amount that you borrow. The interest is the additional amount that you’ll owe as compensation for borrowing a lender’s money. Still, not all mortgage types are created equal.
It’s important to choose a mortgage that factors in your financial goals, needs, and budget – both in the short and long term run. This post will identify 6 common mortgage types and aims to help you pinpoint the best mortgage type for you at LendPro.
- Conventional Mortgages
Conventional mortgages are loans not backed by the federal government, and maintained by private lenders like the bank and individual lenders.
As this type of mortgage is not guaranteed – an individual’s financial situation becomes a decisive factor in getting approved. A credit score of 620 or higher is required to apply for most conventional mortgages. For those with strong credit scores, stable employment, and the ability to make at least a 3% down payment, they can usually qualify for a conventional mortgage backed by Fannie Mae or Freddie Mac.
Keep in mind that borrowers will need to make a down payment of at least 20% if they want to avoid paying private mortgage insurance (PMI).
Are conventional mortgages for you? If you have a credit score of 700 or higher and can make that 20% down payment, conventional mortgages can be a great option. If you qualify, you’ll see more flexibility on loan terms, avoid PMI, and pay a lower interest rate in the long run.
- Conforming Loans
Conforming loans are those that meet Fannie Mae and Freddie Mac guidelines, and a type of conventional mortgage. These loans are bound by maximum loan limits set by the Federal Housing Finance Agency. For 2022, the baseline maximum loan limit is $647,200. However, the FHFA generally sets higher limits for expensive cities like New York City and San Francisco.
The fact that these loans meet Fannie Mae and Freddie Mac guidelines makes conforming loans the most popular to lenders. Once a lender gives a mortgage to a borrower, the lender will proceed to offload that mortgage by selling it to Fannie Mae and Freddie Mac. This, in turn, means reduced risk for the lender and low-interest rates for the borrower.
Are conforming loans for you? Again, you’ll want a credit score of 700 or higher and be able to make at least a 20% down payment for the best rates. Conforming loans have lower interest rates than most conventional loans, but remember that there is a loan limit. The value of your desired property will need to fit inside this limit. At LendPro, we can help you find out what your loan limits are.
- Non-Conforming Loans
Non-conforming loans are those that fall outside of the FHFA parameters and do not meet Fannie Mae and Freddie Mac guidelines. They can either be government-backed or privately funded. Credit scores for non-conforming loans are more lax, but you’ll still need a score of 680 or higher for reasonable rates.
Are non-conforming loans for you? For those seeking higher-end and more expensive properties, non-conforming loans (such as jumbo loans) may be the only choice available.
- FHA Loans
Federal Housing Administration (FHA) loans are government-backed loans that many low-to moderate-income buyers turn to. FHA loans have easier credit score requirements when compared to conventional mortgages and don’t require substantial down payments. A credit score above 500 qualifies an individual for a 10% down payment, and a credit score above 580 qualifies an individual for a 3.5% down payment.
The primary drawback to FHA loans is the non-avoidable mortgage insurance premium (MIP). All borrowers are expected to pay the MIP which is a type of mortgage insurance that protects the FHA-approved lender from borrower default.
Are FHA loans for you? If you have a credit score between 500 and 620 or can not afford a sizable down payment – consider an FHA loan. There’s also the flexibility to add a co-borrower’s income to get approved if you don't qualify by yourself. We can help you with that.
- USDA Loans
U.S. Department of Agriculture (USDA) loans are another government-backed loan aimed at supporting lower-income individuals. This loan is offered in all 50 states and is a zero-down financing plan. Still, extra fees such as an annual and upfront loan charge (which can be financed into the loan) are applicable.
Those who qualify for USDA loans must purchase a home in a USDA-eligible area (which tends to be rural) and meet income limits to qualify. The USDA income limit for 2022 is $91,900 for 1 to 4 member households and $121,300 for 5 to 8 member households.
Are USDA loans for you? USDA loans are best for low-income individuals in eligible rural areas with little money saved up for down payments.
- VA Loans
The last loan that we’ll be covering is government-backed Veterans Affairs (VA) loans. VA loans are exclusively eligible for military service members, veterans, and their spouses. No down payment or insurance is required, and there are fewer closing costs with VA loans. Still, there is a funding fee that may be waived if certain circumstances are met.
Are VA loans for you? If you qualify for VA loans and are able to waive the funding fee, this is the best loan for you. These loans are flexible, offer competitive interest rates, and closing costs may be covered by the seller.
So that’s it. Those are the top 6 questions to ask to find the best mortgage for you and your personal situation. Have more questions or want to get started? Contact us at LendPro today and let us work for you.