From the first time you googled “houses for sale,” you knew that you'd eventually have to apply for a mortgage. Then you googled “mortgage” and found out how much more there is to mortgages than meets the eye. There are private loans and government-assisted loans, standard loans and jumbo loans. It's enough to make your eyes cross.
Don't worry – we're here to straighten things out. Read on to learn about the different types of home loans available and which options might be right for you.
This is basically your standard mortgage; the kind you can get through banks or private lenders. Compared to government-backed loan options, which we'll cover later, a conventional loan offers things like lower interest rates, an easier application process, and few eligibility requirements.
To qualify, you'll need to have:
- A credit score of at least 640
- A debt-to-income ratio of 45% or less
- A verifiable income and down payment source
- No major money problems in your recent history
- Any other documentation your lender might require
If you qualify, you'll have a number of options for loan terms. You'll have to make decisions about your loan term, interest rates, and what your down payment is going to be
- Loan term. Do you want to pay back your mortgage in 10 years? 20? 30? These are common choices, but they're not your only options.
- Interest rate. Do you want a fixed rate, which stays the same as long as you have your loan, or an adjustable rate, which can go up or down with the open market?
- Down payment. How much can you afford? Conventional loans usually require a down payment of 5 to 20 percent, depending on your lender.
You might be tempted to put down less, but be aware – a higher down payment means that you'll pay less in the long run, since you won't accrue as much interest.
The Conventional 97 Mortgage
If you don't have a lot of cash, the Conventional 97 program allows you to put down just 3 percent. This program can make a mortgage more accessible for many first-time home buyers. There aren't as many restrictions as you might expect, but you do have to commit to some things:
- Mortgage insurance coverage
- A one-unit principal residence (no investment properties)
- A fixed-rate mortgage with a term of 30 years or less
- Avoiding high-value loans
Ask a lender for more information or check out the details on Fannie Mae's website. (Fannie Mae finances mortgage lenders and connects people to affordable mortgage options. They also determine what counts as a “high-value loan.”)
Also known as non-conforming loans or jumbo loans, this category includes all mortgages that are above Fannie Mae's limits. (Freddie Mac, which operates much like Fannie Mae, has the same limits.) For 2019, the limit is $484,350 for a single-family home.
If you're lucky enough to be able to afford a jumbo loan, you'll need a credit score of at least 700. Some lenders even require 720 or higher.
They might also ask for a debt-to-income ratio of 45 percent, though they might be more lenient if you're flush with cash.
For less affluent and first-time home buyers, jumbo loans can be excessive. If you fall into one of those categories, consider looking into government-insured loans instead.
Insured by the Federal Housing Administration, these loans are extremely popular with first-time home buyers. You can qualify with: a FICO score of 580 or higher and a3.5 percent down payment, or a score of 500-579 and a 10 percent down payment. You’ll also need a debt-to-income ratio under 43 percent and proof of employment and a steady income.
You will also have to purchase mortgage insurance and commit to using the home as your primary residence.
Although FHA loans are government-backed, you apply and borrow through private lenders.
VA loans, backed by the Department of Veterans' Affairs, are available to service members, veterans, and qualifying family members. If you fit into any of these categories, can afford loan payments, and have good enough credit, visit the Veterans' Affairs website and find out how to get your Certificate of Eligibility.
This is the same USDA that grades your beef – the United States Department of Agriculture. Believe it or not, their scope goes far beyond meat and milk.
For instance, if you're buying a home in a rural area, the USDA might be able to help you get a mortgage with no down payment and low insurance costs. The program is designed for lower-income residents and has location eligibility restrictions, so check those out if they apply to you.
Mortgage borrowing is all about decisions. Conventional or government-insured? Fixed or variable rate? 15-year or 30-year? Start with the programs that you might be eligible for and research what your rate would be based on your finances and location.
Then you can go back to fantasizing about your dream home.