You’ve found the perfect neighborhood, the perfect house, perhaps even the perfect realtor and paint colors for your new home. But, what about the mortgage itself? When I was purchasing my first home, I figured it was the mortgage company’s job to research out the different options about what I’m eligible for and to pick the best option for me. While there are certainly great companies out there that will help educate you as to options, it’s also true that they are trying to pick what suits them best as well. Since they have a vested interest in selling you a mortgage! This is the first of a two-part series in helping you understand what is available to a prospective homeowner trying to navigate the terminology and options of choosing a mortgage.
This first part of the series focuses on the different investors of loans – who is offering you the loan and backing it up financially. Many banks, credit unions, and mortgage companies will offer more than one of the options listed below, but if you are partial to one or the other (or example, FHA loans), ask whether the mortgage company in question offers them.
- Conventional – These are the standard loans, generally from private (non-government) companies. The interest quotes you see in banks are generally referring to the APR (annual percentage rate) on conventional loans. As a rule, the better your credit score, the better the rate you’ll get, but you would want at least a 650 or so to be qualified. Aiming for 700 or above is even better. If you don’t have great credit, but you have a lot of cash available, you may be able to “buy points” – or pay up front for a lower interest rate. The downside to these loans is that they generally require a larger down payment. However you can seek options for down payment assistance, particularly if you are a first-time homeowner – which can include anyone who has not been on a mortgage in 3 years.
- Fannie Mae/Freddie Mac – These loans are invested by the government and carry some unique benefits. They are appealing because of low interest rates and the fact they are eligible for certain hardship programs if you fall onto hard times. However, they require a favorable credit score (675 or better generally) and your bank or mortgage company has to participate in Fannie/Freddie loans.
- FHA – Federal Housing Administration. Often these loans have lower credit score requirements, which makes them appealing – sometimes as low as 620 or 625. Interest rates are generally comparable to the other types of loans, but make sure to check all the details. FHA loans almost always have Mortgage Insurance requirements. While conventional loans only charge this fee for a certain number of months or years (if at all), some new FHA loans require it for the life of the loan – up to 30 years – which can add up. Most homeowners who choose this option plan to refinance within the next few years once their credit is better, but realize that you must keep up your income and improve credit to be able to do so!
- USDA – United States Department of Agriculture. The USDA provides loans and subsidies for mortgages in rural areas for families who have income under a certain threshold. These loans are often appealing because you can put 0% down toward down payment and may be eligible for a partial subsidy on the payments. If you are interested in more information or eligibility in your area, check out http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do.