Whether it’s your very first home, or you’re moving for the third time in your life, moving house is always an exciting process. Amongst all of the giddiness though, there is usually a lot of stress involved. We all know that mortgages aren’t cheap, and that if we want to be able to cope with the monthly payments, we have to choose the right one for our needs and lifestyle. In 2017, homebuyers are left with a very difficult decision, as there are numerous types of mortgage loans on the market, all offering something unique but useful. If you’re amongst the thousands who are struggling to make a final decision, hopefully this in depth guide will help you to identify the right mortgage loan for you.
All loan types fit into categories and overall, it kind of looks like an ancestry tree – at the top you have a fixed-rate or adjustable-rate loan. As a borrower, it’s inevitable that you’ll come across these two types of loan, and you’ll have to pick one before you carry on with the home buying process. For a fixed-rate mortgage loan, you will receive the same interest rate throughout the entire payment process, meaning that your monthly payment will never fluctuate, allowing you to budget for all other expenses easier. Some people often get confused about whether this applies for long-term financing options, and the great answer is that it does, even for a 30-year fixed rate mortgage loan! Although, whilst having a fixed rate loan allows you to budget your finances easier, this novelty does come with a cost of higher interest charges overall compared to the initial rate of an adjustable-rate loan.
Of course, as a FRM loan and an ARM loan are opposites, you can already guess what’s involved with an ARM loan. As you’d expect, adjustable-rate loans have an interest rate that fluctuates over time, either increasing or decreasing. Usually, the interest rate on an ARM loan will change on an annual basis after an initial period of remaining fixed, which is why it’s often referred to as a “hybrid” product. For a hybrid ARM loan, the interest rate begins fixed and unchanging before then switching to an adjustable rate. To put this into perspective for you, the 5/1 ARM loan has a fixed interest rate for the first 5 years, which then transforms to an annual adjustment after that duration. The ARM seems favourable to many as the interest rate will always begin lower than for an FRM loan, however later adjustments do provide home-owners with uncertainty.
So, once you’ve made the decision of either fixed or adjustable, you’ll need to consider either government-insured or conventional. If you’re wondering about a conventional loan, the main thing you need to know is that it isn’t insured or guaranteed by federal government. Of course, the core benefit of this mortgage loan is the fact that you can completely evade mortgage insurance. As long as you make a payment of 20% or more, mortgage insurance won’t be an issue for you. However, pay under 20%, and you’ll be approached by PMI, increasing the value of your monthly payment, although the cost of PMI is usually much less than the insurance attached to government-insured loans, such as a FHA. These are all things you need to consider before making this choice.
There are three main government-insured loans that you’ll need to consider, which are FHA, VA and USDA. Naturally, all three will offer different qualities when it comes to your mortgage payments, so listen carefully about what each one has to offer before choosing one.
The FHA (abbreviated from Federal Housing Administration) mortgage insurance type is overlooked by the HUD, which is an important part of the federal government. No matter whether you’re a first- time buyer or you’re purchasing your fifth home, this type of mortgage loan is available to all borrowers. When selecting an FHA loan, the government will insure the lender against losses which could be the outcome from borrower default. FHA loans are favourable because you have the opportunity to make a down payment from as little as 3.5% of the purchase price, so you can keep those all-important pennies in your pocket. Although, mortgage insurance will be an extra cost that you’ll have to deal with, increasing the overall sum of your mortgage monthly payments.
In addition, the approval procedure for an FHA loan is usually much simpler, and the chances of having your loan request approved are higher compared to the conventional loan. As the mortgage comes from official federal government members, they are less strict about the borrowers that they’re happy to lend to. Is your credit score as low as 500? Not to worry, as those applying for FHA loans have often been approved with a credit score as low at that! Plus, with a FHA mortgage loan, the lender will review your debt-to- income ratio, also known as DTI. If you’re unsure about what this is, it’s simply a comparison between the income that you receive each month and the amount that you pay towards your debts. So, the lower your DTI ratio, the higher your chances of loan approval. But, with an FHA loan, approval is made easier, as it’s still possible to be approved for an FHA loan with a DTI ratio as high as 58%.
The U.S Department of Veterans Affairs (often abbreviated to VA), offers a beneficial loan program to those involved in military services, including members themselves or their families. Being lent by federal government, a VA loan will reimburse the lender for any losses that could result from borrower default, like the FHA. Whilst a VA loan is reasonably similar to the FHA loan in terms of being guaranteed by federal government, there are of course some slight changes to the lending procedure. A gigantic advantage of this mortgage loan type is the fact that borrowers can receive 100% financing for the purchase of a home, meaning that no down payment is needed at all!
Of course, this sounds wonderful, but you must remember the crucial part – they’re only eligible to those involved in the military services. Even then, there are further requirements that need to be met before you can be granted access to a VA loan. Some of these include, but aren’t limited to, the following:
- You must be a veteran who has served 181 days during peacetime.
- You have served a minimum of 6 years in the National Guard or Reserves.
- You are the un-remarried spouse of a veteran who died whilst in service.
If you’re a rural borrower, the United States Department of Agriculture (USDA) may be able to provide you with a suitable mortgage loan, regarding that you meet a certain income requirement. Managed by the Rural Housing Service (RHS), this mortgage loan type is offered to rural residents who have a “steady, low or modest” income, meaning that they’re unable to obtain satisfactory housing through conventional financing. The income that these rural borrowers earn must be no more than 115% of the adjusted area median income (AMI), although this figure does vary by county.
There are several ways in which a USDA loan can be used, however they must be used for these purposes. A select few of these include:
- Site preparation costs (grading, foundation plantings, seeding etc.).
- Special design features or permanently installed equipment to accommodate a household member with a physical disability.
- New or existing residential property to be used as permanent residence.
Of course, the list goes on, so if you’d like to have more access to the terms and conditions for having a USDA loan, all of the information you need can be found on the web.
Finally, the last major choice that you need to make is whether you want a jumbo loan or conforming loan, which concerns the overall size of your loan. Therefore, this completely depends on the amount that you intend to borrow for a mortgage loan, which will then determine whether you qualify for a jumbo loan or a conforming loan. For a conforming loan, you must meet the requirements of Fannie Mae or Freddie Mac, which are two government-controlled corporations that purchase as well as sell mortgage-backed securities. For a better understanding of these two corporations, all you need to know is that they buy loans from lenders who supply them, and then sell to investors. When after a conforming loan, the amount you intend to borrow will have to fall within their maximum size limits, otherwise you’ll be restricted to the jumbo loan.
Therefore, as you should understand by now, you will be eligible for a jumbo loan if you exceed the limits that both Fannie Mae and Freddie Mac establish. Because of the mammoth size that a jumbo loan offers, it can often prove as a risk for borrowers, so there are specific requirements needed to finalise a deal with a jumbo loan. Firstly, it’s paramount that you have an excellent credit score and larger down payments compared to those of conforming loans. In addition, interest rates are often much higher with jumbo products, so you need to be able to afford all of these mortgage costs without putting yourself in serious financial risk.
Now that you’ve had a thorough rundown of what each loan offers borrowers, we hope that you are now able to make an informed decision about the loan that is best for you and your requirements. The research doesn’t have to end here though, as there are still many things that need to be considered before getting your mortgage loan, such as who are you going to use for your loan? Once you’ve thoroughly considered all of these, and got a couple other things in order, you should be ready – happy moving!