Buying a home is an exciting step. Parts of the process can be a bit confusing or daunting, especially if it’s your first time purchasing a home. Financing is definitely one area where many people aren’t too sure about their options and how things work. Choosing the right mortgage is so important, as this long-term commitment can have significant effects on your cost of living and the amount of interest you pay over many years. Let’s take a quick look at three major types of mortgages to help you get acquainted with some options.
Remember, financial advice needs to be personalized to your financial situation and goals. This is general information to help you get an idea of what some of your mortgage options are, but you do need to speak to a professional financial/mortgage adviser who can help you make the right decision.
Conventional Mortgage
Conventional loans are often a good mortgage option for homebuyers with good credit (a minimum FICO score of 620) and stable income. These loans can be used when buying a first home, second home, or investment property. For a main residential purchase, the maximum loan to value is 97% and Private Mortgage Insurance (PMI) will be required.
When compared to non-conventional options, this type of mortgage can yield significant savings in interest over the life of the loan. There’s no upfront mortgage premium requirement for loans of 80% loan to value or less, and you can choose from several repayment terms with varying mortgage rates. The shorter the repayment term, the lower your mortgage rate.
FHA Mortgage
These are mortgages insured by the federal government through the Federal Housing Administration. They’re well suited to homebuyers who don’t have great credit or a large down payment. You can be accepted with a FICO score as low as 500 if you have at least a 10% down payment, or you can get the FHA’s maximum 96.50% financing with a FICO score of at least 580. This type of mortgage is often ideal for first-time homebuyers, as they tend to have lower credit scores and sums for a down payment.
Because FHA loan requirements aren’t as stringent as those for conventional mortgages, you do have to pay two types of mortgage insurance premiums. One is typically paid fully upfront, and can be added to the loan, the other is a monthly or annual payment made for the life of the loan.
VA Mortgage
This is another type of federally insured loan, backed by the Department of Veterans Affairs. It is available to those who have served or are currently serving in the US military, as well as veterans’ surviving spouses. It is an excellent option for helping veterans achieve home ownership.
Buying a home with a VA mortgage requires no down payment or private mortgage insurance (PMI), and it also offers a low interest rate and little to no closing costs. Borrowers must have sufficient credit and income, as well as a certificate of eligibility. Also, this type of mortgage can only be used for buying a primary residence. This option does become more expensive after the first, as the VA funding fee increases with subsequent uses of eligibility.
