Whether you’re a first-time homebuyer or purchasing your forever home, homebuying can be a complicated process that requires many decisions and expert guidance – from real estate agents, mortgage lenders, and other housing professionals – to guide you in the right direction along the way. You may have found your perfect home, but picking your perfect loan, is another crucial factor you’ll need to consider.
How to Choose Your Home Loan
Much like the many different homes you’ll tour before picking the one you want topurchase; you’ll also be presented with various loan options for financing your new home. There is no one-size-fits-all mortgage, and the one that’s your best match will be based on many factors, including your financial situation, loan amount, purchase area, and other criteria.
An experienced mortgage lender can help you find the home loan that makes the most sense for your scenario. In the meantime, below is a snapshot of the three most common types of mortgages, so you can get anidea of which one may be your best home financing fit.
An FHA loan is insured by the Federal Housing Authority. It is a federally-backed mortgage designed for low-to-moderate-income borrowers. An FHA loanallowsa lower credit score than a conventional mortgage. Currently, borrowers with a minimum credit score of 580 and who can put as littleas 3.5% down, may be eligible for an FHA loan.
Those with even lower credit scores may also be eligible but would be required to make a higher down payment. Mortgage insurance must be paid on an FHA mortgage – both upfront at closing or rolled into the loan, plus monthly as part of your regular mortgage payments. FHA loans are issued by FHA-approved banks and lending institutions.
The FHA has a maximum loan amount that it will insure, known as the FHA lending limit. For 2021, the FHA limit was set at $356,362 for single-family home loans. This amount covers 80% of all U.S. counties. Also for 2021, the FHA ceiling was set at $822,375 for single-family home loans. This represents the highest amount that a borrower can get through the FHA loan program and applies to high-cost areas in the United States.
A conventional loan is a mortgage that is not backed or secured by a government entity. It is available through and guaranteed by a private lender or one of the two government-sponsored enterprises, Fannie Mae and Freddie Mac. As the federal government does not guarantee these loans, they have stricter qualification standards.
A conventional mortgage is best for borrowers with a great credit score, at least 620 but preferably 700 or higher, stable employment and income, and a debt-to-income ratio of less than 50%.
Down payment requirements can vary based on your situation and the type of loan or property you’re buying, and can range from 3% to 20% or more. If you put down less than 20% on a conventional loan, you’ll be required to pay for private mortgage insurance (PMI).
Most conventional mortgages are “conforming,” which means that they meet the requirements to be sold to Fannie Mae or Freddie Mac. Conventional mortgages can also be non-conforming, which means that they don’t meet Fannie Mae’s or Freddie Mac’s guidelines. One type of non-conforming conventional mortgage is a jumbo loan, a mortgage that exceeds conforming loan limits.
For a conforming conventional loan, your loan must fall within the loan limits set by Fannie Mae and Freddie Mac. The loan limit changes annually, which for 2021 is $548,250. There are exceptions, however. Alaska, Hawaii, and high-cost areas of the country have higher loan limits, ranging up to $822,375 for 2021.
A VA home loan is for active military service members, veterans, or their widowed spouses. This mortgage is backed by the Department of Veterans Affairs and issued by private lenders. It allows borrowers to finance up to 100% of the home purchase price, which means that no down payment is required.
To qualify, lenders look at credit history and other factors to determine the borrower’s ability to pay back the loan. There is no minimum credit score to qualify, but lenders usually look for 620 or higher.
With a VA loan, there are no pre-payment penalties, and no mortgage insurance is needed. But the home being purchased must meet specific standards that the VA requires.
When it comes to homebuying, having a trusted mortgage advisor to guide you through the loan process is essential. The loan experts at Cross Timbers Mortgage can help make your dreams of homeownership a reality and assure that you are matched with the right mortgage and the lowest rates. Get in touch with us today for your mortgage pre-qualification.