If you’re on the path to first-time homeownership, congratulations! This is an incredibly exciting chapter in your life, but one with a transition that can be a bit confusing as you hunt for homes, compare lenders, and navigate complex mortgage structures.
A house is one of the largest purchases you can make in life, but there are many myths about money that cause many buyers to go through a great deal of stress in search of their dream home. If you recall all the foreclosures that happened during the recession following the 2008 market crash, then you know that mortgages aren’t something to be taken lightly.
After you find the property that fits your needs and checks all the right boxes, you’ll have to choose a mortgage plan that makes the most sense for your financial circumstances. Today’s post is going to break down a few of those options so you can feel more confident and informed as you make your decision.
- Conventional Mortgages
These are called conventional because they conform to the Freddie Mac and Fannie Mae standards set by the government, but they are not government insured. This poses a greater risk to lenders because they are not guaranteed repayment in the event the loan defaults; rather, they are forced to take a personal loss.
For these reasons, conventional mortgages are more difficult to obtain with stricter lending requirements. The minimum qualifying credit score is around 620, but you need at least a 740 to receive a good interest rate.
The down payment requirement will vary lender by lender, but buyers who put down at least 20% or more do not have to pay for the mortgage insurance required by most government loans and lower down payments. When the principal balance drops below 78% of the home’s value, you no longer have to pay mortgage insurance—which is a benefit not offered by government-sponsored loans.
Interest rates can be as low as 3% depending on your credit and how much money you put down, with a typical lifespan of 15, 30, or 30 years.
- VA Loans
This mortgage plan is backed by the Department of Veterans Affairs in order to provide service members and their families with affordable housing. In order to meet VA loan eligibility and qualify for special rates, you must be an active duty military personnel or veteran in California and Hawaii.
If you meet the eligibility criteria, it’s much easier to get approved for a VA loan because the income and credit requirements are much lower than conventional mortgages. Your score can be as low as 550 in some circumstances with little to no down payment. They typically do not requirement monthly mortgage insurance, but the application approval process can be slower than it would be through a private lender.
- FHA Loans
These are the most common mortgages for first-time homebuyers and those with less than favorable credit history. The Federal Housing Administration guarantees a portion of the loan, so lenders are able to widen their acceptance standards. The lender’s stake in the loan is also protected by the mortgage insurance premium in case the borrower defaults.
Although you can pay as little as 3.5% down, you should expect to face higher closing costs as well as meet the rigorous appraisal standards required by the FHA. However, you also have the option of FHA 203(k) which considers the value of a property after home improvements are made. This option is best suited for buyers who want to tackle a fixer-upper and borrow the funds to complete the renovations as part of the main mortgage plan.
If you qualify for multiple mortgages and still can’t decide which one is best for you, ask yourself which of the following is most important: fast close, a low down payment, or low closing costs?
At the end of the day, it’s important to carefully calculate your decision—not to just jump the gun on homeownership because someone warned you about “throwing money away on rent”. Although you might want to buy before the market crashes again, only do so if your mortgage structure offers favorable terms with low interest rates that work for your budget.