What mortgage loan is best for you?
Unless you can buy your home entirely in cash, finding the right property is only half the battle. The other half is choosing the best type of mortgage. You’ll likely be paying back your mortgage over a long period of time, so it’s important to find a loan that meets your needs and budget. When you borrow money from a lender, you’re making a legal agreement to repay that loan over a set amount of time.
There are six main types of mortgages. You will most likely have to meet stringent eligibility requirements for income, loan limits, down payment, and geographic areas. Following are the primary loans you can consider:
Conventional mortgages. A conventional loan is a loan that is not backed by the federal government. Borrowers with good credit, stable employment and income histories, and the ability to make a three percent down payment can usually qualify for a conventional loan backed by Fannie Mae or Freddie Mac, two government-sponsored enterprises that buy and sell most conventional mortgages in the U.S. To avoid needing private mortgage insurance, borrowers generally need to make a 20 percent down payment. Some lenders also offer conventional loans with low down payment requirements and no private mortgage insurance.
Conforming mortgage loans. Conforming loans are bound by maximum loan limits set by the federal government. These limits vary by geographic area. For 2021, the Federal Housing Finance Agency set the baseline conforming loan limit at $548,250 for one-unit properties. However, the FHFA sets a higher maximum loan limit in certain parts of the country. That’s because home prices in these high-cost areas, such as New York, San Francisco, and Denver) exceed the baseline loan limit by at least 115 percent or more.
Nonconforming mortgage loans. Nonconforming loans generally can’t be sold or bought by Fannie Mae and Freddie Mac, due to the loan amount or underwriting guidelines. Jumbo loans are the most common type of non-conforming loans. They’re called jumbo because the loan amounts typically exceed conforming loan limits. These types of loans are riskier to a lender, so borrowers typically must show larger cash reserves, make a down payment of 10 to 20 percent or more, and have excellent credit.
Government-insured Federal Housing Administration (FHA) loans. Low-to-moderate-income buyers purchasing a house for the first time typically turn to loans insured by the FHA when they can’t qualify for a conventional loan. Borrowers can put down as little as 3.5 percent of the home’s purchase price. FHA loans have more relaxed credit score requirements than conventional loans. All borrowers pay an upfront and annual mortgage insurance premium, a type of mortgage insurance that protects the lender from borrower default for the loan’s lifetime.
Government-insured Veterans Affairs Loans. The U.S. Department of Veterans Affairs (VA) guarantees home buyer loans for qualified military service members, veterans, and their spouses. Borrowers can finance 100 percent of the loan amount with no required down payment. Other benefits include fewer closing costs, better interest rates, and no need for PMI or MIP. VA loans do require a funding fee, a percentage of the loan amount that helps offset the cost to taxpayers. The funding fee varies depending on your military service category and loan amount. VA loans are best for eligible active military personnel or veterans and their spouses who want highly competitive terms and a mortgage product tailored to their financial needs.
Government-insured U.S. Department of Agriculture (USDA) loans. The USDA guarantees loans to help make home ownership possible for low-income buyers in rural areas nationwide. These loans require little to no money down for qualified borrowers, as long as properties meet the USDA eligibility rules. USDA loans are best for homebuyers in eligible rural areas with lower household incomes, little money saved for a down payment, and can’t otherwise qualify for a conventional loan product.
Consult with your real estate agent who will refer you to reputable lenders who can provide expert advice about what loan is best for you or what type of loan for which you can qualify.