Before we dive into telling you a little more about what mortgage options you may have when buying a new house (or refinancing), we do want to remind you that you should always check with a mortgage banker to confirm which option may best suit your needs and situation. As real estate agents, these are the mortgage types that we have generally seen best suit our clients’ situations.
Conventional Loan (15- or 30-Year Fixed)
A conventional loan is the most common type of mortgage. These loans have fixed interest rates for the duration of the loan (typically either 15 or 30 years). While 15-year fixed-rate mortgage loans have higher monthly payments, they typically have lower interest rates, and homebuyers will end up paying more interest than they would with a longer loan. 30-year fixed-rate mortgages have lower monthly payments, but total interest paid will be higher than that of a shorter-term loan.
Many people think that you must have a 20% down payment to qualify for a conventional loan, but this is not the case! It is possible to only put down as low as 3% with a conventional mortgage, but keep in mind that with a down payment lower than 20% you will likely be required to pay private mortgage insurance (PMI).
Ultimately, buyers love the predictability of having a mortgage payment that never changes – and the opportunity to pay the loan off early by paying additional principal payments.
Who a conventional loan might be best for: homebuyers with good credit and/or a down payment of 20% or more
FHA loans are loans regulated and insured by the Federal Housing Administration (FHA) and come from private lenders. Using an FHA loan, a down payment on a home could be as low as 3.5%. In many cases, FHA loans are available to homebuyers with lower credit scores and higher debt-to-income ratios.
It is important to note that FHA loans usually require monthly mortgage insurance premiums and could be subject to loan limits less than those of conventional mortgages. Additionally, FHA appraisals are stricter than those for conventional loans as the home is subject to stringent safety and construction requirements.
Who an FHA loan might be best for: homebuyers that have lower credit scores and/or a smaller down payment
VA loans can be one of the most flexible types of mortgages with no required down payment, capped closing-costs and low interest rates. Additionally, no mortgage insurance is required. These loans are backed by the Department of Veterans Affairs and are available for members and veterans of the military.
While there is technically no set minimum credit score for homebuyers looking at VA loans, individual lenders may set requirements for credit, income, and debts. The home you are looking to buy is also subject to appraisal standards and so some fixer-upper properties may not meet these requirements.
Who a VA loan might be best for: active duty-service members or veterans of the Armed Forces
As a reminder, this is not a comprehensive list of all of the mortgage loans available to homebuyers. We encourage you to look fully into your possible options and speak with one or more mortgage bankers to explore how best to proceed. Keep in mind, that even if you do not yet have a specific home you are looking to buy, it can be incredibly helpful to start the pre-approval process with a lender so that when you do find that special home, you are ready to make a move.
If you have any questions or looking for a referral to a mortgage banker, don’t hesitate to reach out to any of the agents at 307 Real Estate. We look forward to help guiding you through the homebuying process!