What types of mortgages may be available to me?

Conventional loans

These are regular mortgage loans that are not part of any government loan program, such as Department of Veterans Affairs (VA) loans or Federal Housing Administration (FHA) loans. Conventional loans can be both conforming or non-conforming.

Conforming. A conforming loan meets the qualification standards imposed by Freddie Mac and Fannie Mae, such as maximum loan size, credit scores, the size of your down payment in relation to your total mortgage and your total debt. If your mortgage fits within their specific criteria, it will be bought by Freddie Mac or Fannie Mae.

Some counties may have higher maximum loan sizes, which Freddie Mac or Fannie Mae will still buy. These loans are known as conforming jumbo loans.

Non-conforming. A non-conforming loan doesn’t meet the criteria of a conforming loan and therefore isn’t usually bought by Fannie Mae or Freddie Mac in the secondary market.

• Jumbo loans. One of the more common types of non-conforming loan is the jumbo loan, which refers to a loan that is larger than the maximum loan size set by Freddie Mac and Fannie Mae. This limit is usually $417,000, but can be as high as $625,000 in states such as Alaska and Hawaii. The maximum amount you can borrow with a jumbo loan depends on your county.
• High LTV loans. LTV stands for loan-to-value ratio and refers to your down payment as a percentage of the property purchase price. For example, on a property worth $300,000, if you had a down payment of $30,000, your LTV would be 90% ($30,000 is 10% of $300,000). LTVs above 80% require private mortgage insurance (PMI) and may also be classified as non-conforming depending on the lender.
• Loans with lower documentation requirements. These loans are for those with complicated finances, such as the self-employed.
• Loans for non-standard properties. Non-standard properties that are difficult to appraise, such as those producing an agricultural income or those with large amounts of land, may require a non-conforming loan.
• Loans for credit-impaired borrowers. To qualify for a conventional mortgage, you’ll usually need a minimum credit score of between 580 and 640 depending on the lender. Those who have recently declared bankruptcy may also find it difficult to get a conforming loan.
• Loans for those with high total debt. Those with a high load of debt in proportion to their income may not qualify for a conforming loan.

 

FHA

This type of loan is insured by the Federal Housing Administration (FHA), and allows borrowers to purchase a property with a lower down payment and with less-than-stellar credit scores.

The basics:

• You can borrow with a down payment of as little as 3.5% (this has a minimum credit score requirement of 580).
• You can apply with a credit score of as little as 500 (credit scores of between 500 and 579 require a minimum down payment of 10% of the purchase price).
• Requires two forms of mortgage insurance, both which are paid monthly
• Is assumable, which means that if you sell your property the buyer can take up your loan, making it more appealing
• Must be used for a primary residence

FHA loans have a number of other eligibility requirements, particularly around your employment history and debt ratio, so be sure to do your research before applying for one.

 

VA

If you’re eligible, a Veterans Affairs (VA) mortgage can be a great way to buy a home with no down payment or mortgage insurance.

The basics:

• No down payment depending on the borrower
• Competitive interest rates, usually 0.5-1% lower than conventional rates
• No mortgage insurance premium is payable
• Is assumable if the buyer is also eligible
• Allows you to prepay your mortgage with no penalty fees
• Must be used for a primary residence
• Backed by the Department of Veteran Affairs, but funded by private lenders

As with the FHA loan, a VA loan comes with a range of eligibility requirements. You will be required to fulfil one of the following conditions:

• During wartime: 90 days of active service
• During peacetime: 181 days of active service
• Over 6 years of service in the reserves or national guard
• Spouses of those who have fallen in the line of duty

You’ll also need to supply your lender with a certificate of eligibility, and you’ll need a stable income to pay your mortgage off, among other eligibility requirements.

 

USDA

A loan from the US Department of Agriculture is aimed at low to medium income borrowers who want to buy in a rural area. USDA loans offer benefits similar to a VA loan, including no down payment required, but still requires private mortgage insurance.

The basics:

• No down payment required
• Loans are either guaranteed by the USDA and issued by private lenders, or they are direct loans from the USDA, or they are smaller loans and grants for home improvement
• The loans must be used for primary residences
• Applicants must have 24 months of stable income and an acceptable credit history
• Debt ratio and credit score requirements also apply

State and local programs

In addition to conventional loans and special program loans like those from the FHA, VA or USDA, there are a range of state and local programs to help Americans buy a home. These include programs targeted at those with low or moderate incomes and other groups, so be sure to speak to a housing counselor in your local area to see what may be available.

 

How can I compare mortgages?

1. Decide on a loan type. First, decide whether a fixed rate or adjustable rate mortgage is more suited to your plans and budget. This is also a good time to find out what your credit score is and know what loans are available to you.
2. Shop for different loans. Compare what different banks and lenders are offering for your chosen loan type and down payment.
   • Use the APR. The annual percentage rate (APR) is an interest rate that includes some of the fees and charges of your loan. This can be a more accurate way to compare loans, but be aware that this is only an indication of the cost of your loan over the full term. Getting out of your mortgage early will make the effective APR much higher.
   • Be wary of advertisements including points. When comparing loan rates, some lenders might advertise rates inclusive of discount points. This isn’t necessarily bad, but when comparing loans you’ll want to exclude discount points on all loans to make your comparison fair.
   • Find out about rate locks. If you’re interested in a loan, you might want to know if you can lock in a rate so that it doesn’t go up during the application process. Find out what fees will apply if this is a feature you’re interested in.
   • Be mindful of prepayment penalties. Make sure you check potential loans to ensure there are no prepayment penalties, as you will more than likely want to change homes in the future.
3. Ask for a Loan Estimate. A lender must give you a Loan Estimate by law. This three-page document shows you the interest rates, repayments, closing costs and even has a section on the last page that gives you the key figures to use when comparing.
4. Repeat until you find a loan you want. It’s normal to ask for Loan Estimates from more than one lender until you find a loan you’re happy with.Back to top

How can I get the best rate on my mortgage?

• Compare multiple lenders. Always get more than one quote when looking for a mortgage. This will ensure you get a good mix of options from different types of lenders.
• Get your credit score in order. A credit score above 740 can open the door to more competitive interest rates and loans, even special government program loans such as FHA and VA loans. Better credit scores can give you benefits such as lower required down payments.
• Consider paying for points. Discount points are upfront charges you can pay to reduce the interest rates on your loan. You should work out whether or not paying for points will have a beneficial effect on your total cost in the long run, especially if you don’t plan on keeping your home for the long term.
• See if you qualify for special programs. There are government, state and local programs that may offer competitive rates and terms, so be sure to check these out.
• Save a larger down payment. The bigger your down payment is, the less of a risk you present to your lender. Borrowers with lower risk are rewarded by lenders with better interest rates.
• Lower your debt-to-income ratio (DTI). Your total debt load will affect what loans you qualify for, which means you may be able to take out a lower rate. This makes it a good idea to pay off and close any other credit cards or loans you don’t currently need if you’re shopping for the best rate.

Back to top

Back to top