Buying a home is a complicated, costly endeavor. Most people don’t go into the home buying process equipped with the knowledge necessary to land the best mortgage loan right off the bat. Yet, asking the right mortgage loan questions to acquire that knowledge and feel empowered in the process can be nothing short of intimidating.
So before you embark on this life-changing journey toward homeownership, let’s answer some basic questions to get you primed and ready to make the best decisions for your situation.
Question #1: What are the different types of mortgage loans?
Let’s start with the basics.
When you look for a mortgage loan, you’ll be faced with two important decisions: fixed vs. adjustable rate and government backed vs. conventional.
A fixed-rate mortgage means your interest rate will be locked in for the entire loan term. An adjustable rate mortgage (ARM) will be subject to an interest rate adjustment after a specified time period (three years, five years, etc.). If you plan on staying in your home for more than a few years, a fixed-rate mortgage is usually a safer bet.
A government backed mortgage loan generally refers to FHA or VA loans. FHA loans will allow a low down payment (usually 3.5%), but do require mortgage insurance for the entire length of the loan. VA loans are reserved for current or previous military service members and their families and require no down payment and no mortgage insurance.
Conventional loans are backed by either Fannie Mae or Freddie Mac and often have stricter qualifications than government backed loans. If you opt for a conventional loan with less than a 20% down payment, the lender will likely require that you hold Private Mortgage Insurance (PMI).
Question #2: How much should I have saved before I buy a house?
Unfortunately, there isn’t a black and white answer for this question. However, understanding the impact your down payment can have on your loan might help you decide how much to save before proceeding with the home buying process.
The size of your down payment will impact several different things: the amount you will pay in monthly mortgage payments, whether or not you will have to acquire Private Mortgage Insurance, and the size of the loan you will qualify for. If your credit isn’t up to par, putting more money down might be a requirement just to qualify for a mortgage.
Speak with your lender to see how the numbers stack up and what the best option is for your financial situation now and into the future.
Question #3: What are the credit score requirements to qualify for a mortgage loan?
As with any loan, a better credit score leads to better loan terms and less money out of your pocket over the long run.
For FHA loans, you could be approved with a score as low as 580 and a 3.5% down payment or even lower if you have a down payment of 10% or higher. VA loans don’t actually have a credit score requirement, but the lenders issuing VA loans do – some require a 620, while others might be at 640.
Conventional loans will allow a 620 credit score, but many lenders prefer a score closer to 660 to avoid making applicants jump through additional hoops. A perfect score in the world of conventional loans is 740+, but without a 20% down payment, the optimal score is 760. This is because PMI rates are the best for those with a 760 score or higher.
Question #4: How do I know which mortgage lender to go with?
If your finances are in order and you’re ready to move forward with getting a mortgage and becoming a homeowner, the next step is finding a competent lender you work well with.
There are two options here: going with a bank or a broker. If you have a good relationship with your bank and you like the idea of having all of your accounts under one roof, this might be a good option. However, the downside to this is the possibility that you could be working with someone without much expertise in home loans, or you could be put into a bank product with less than optimal terms.
Brokers, on the other hand, have the ability to shop around for the best loan for your particular needs. This could result in more options and better terms overall. However, it’s important to be sure they aren’t biased towards specific lenders.
The bottom line is really to do your research. Even if you know you are going to go with either a bank or broker, make sure you do a little comparison shopping of your own – beyond what they are doing for you.
Still have more questions about the home buying process and acquiring the right mortgage loan? Read Newbie Mortgage Loan Questions – Part 2.