A mortgage loan is a special type of loan that you can use to purchase a home. While mortgages might seem confusing, just a little research can help ensure that you choose the right type of home loan for your family.
Our complete guide for beginners will help you learn more about the many types of mortgage loans, mortgage tax implications, how to choose a home and more.
Types of Mortgages
There are multiple types of mortgage loan, and the loan type you choose will determine how much you pay in interest, which types of homes you can buy and where you can shop for a property.
Let’s take a look at the 4 major mortgage types: conventional, VA, USDA and FHA loans.
A conventional mortgage loan is the most common type of home loan. A conventional loan is a type of loan that’s not backed by a government entity and provides an affordable way for many buyers to purchase a home. Unlike some other types of loans, you can use a conventional mortgage loan to purchase any type of property so long as your lender approves you for the loan.
Though many home buyers believe that they need to put at least 20% down when they apply for a conventional mortgage loan, the truth is that most lenders accept buyers with as little as 3% down.
However, if you have less than 20% to put down on your home loan, you’ll need to pay for private mortgage insurance (PMI) that protects your lender if you default on your loan. You’ll also need a credit score of at least 620 points and a debt-to-income (DTI) ratio of 50% or less.
A VA loan is a mortgage loan offered to veterans, active service members and select spouses of servicemembers. VA loans are government-backed mortgage loans that have insurance from the Department of Veterans Affairs (VA). While the VA doesn’t issue VA loans itself, its insurance allows lenders to extend loans to more borrowers and with less strict debt and down payment criteria.
Not everyone qualifies for a VA loan. Before you can get a VA loan, you must meet at least 1 of the following service criteria:
- Served 181 days of active service during peacetime
- Served 90 consecutive days of service during wartime
- Served more than 6 years in the National Guard or Reserve
- Be the spouse of a servicemember who lost his or her life as the result of a service-related injury. Under most circumstances, you cannot be remarried.
You can also only purchase a home that you intend to use as a primary residence. You cannot use a VA loan to purchase a vacation home or rental property. Your home must also meet minimum livability standards that ensure that your family can move in shortly after your purchase closes.
Another type of government-backed mortgage loan, USDA loans have insurance from the United States Department of Agriculture. A USDA loan can help you purchase a home in a qualifying rural or suburban area with a lower down payment and lower fees.
To qualify for a USDA loan, your home needs to be located in a rural area. You can see if your home qualifies by using the USDA’s search tool. Like a VA loan, you must use your USDA loan to purchase a home that you plan on living in full-time and that meets minimum livability standards.
You can’t earn more than 115% of the median income in your area if you want to use a USDA loan to purchase a home — you can check to see if you qualify using the same link above and by clicking on the “Income Limits” tab. You’ll also usually need a credit score of 640 points or more and a DTI ratio of 50% or less.
The final type of government-backed loan, FHA loans have insurance from the Federal Housing Administration. The purpose of FHA loans is to allow households with a rockier credit history to qualify for a mortgage loan. Some of the benefits that come with choosing an FHA loan include:
- More lenient credit requirements (in some cases, you might qualify for a loan with a score as low as 500 points)
- More lenient down payment requirements when compared to conventional loan options with a lower credit score
- You can qualify for a loan with a bankruptcy or other financial issue on your credit report
- You have the option to roll your closing costs into the value of your loan, allowing you to pay less down
Like other types of government-backed loans, you can only use an FHA loan to purchase a property you plan to live in full-time. Your home must meet minimum livability standards, and you must occupy the property within 60 days of closing on your loan.
Mortgage Down Payments
A down payment is the 1st major payment you’ll make towards your mortgage loan. Most mortgage lenders calculate down payment using a percentage of the total amount you’re purchasing your home for.
For example, if you’re buying a home for $200,000 and your lender tells you that you need a 10% down payment, you’d need to have a down payment of at least $20,000 before you can close on your loan.
The specific percentage down you’ll need will vary depending on the type of loan you’re using and the type of property you’re buying. Here’s what you’ll typically need to close on each of the 4 major loan types:
- Conventional. Most conventional mortgage lenders require you to have at least 3% to put down on a primary residence. Higher down payments might be required for investment or rental properties, especially if you have limited home buying experience. If you don’t want to pay for private mortgage insurance, you must have a down payment of at least 20% of the purchase price of your home.
- USDA. USDA lenders may allow you to purchase a home with 0% down, assuming you meet qualification standards.
- VA. Like USDA loans, you can use a VA loan to purchase a home with 0% down.
- FHA. Most mortgage lenders require you to have a 3.5% down payment to qualify for an FHA loan so long as your credit score is equal to 580 points or more. Select lenders may allow you to qualify for an FHA loan with a score as low as 500 points but you’ll need to bring a down payment of at least 10%.
Your down payment is due when you close on your mortgage loan.
As soon as you become a homeowner, you’ll be responsible for paying your property taxes. Property taxes go towards your local government and fund things like police forces, public schools, libraries and more.
Depending on which mortgage lender you choose, your monthly payments may or may not include property taxes. Many lenders will include an allotment for property taxes in with your monthly payment. While this increases the price that you pay per month, it also saves you from a $1,000 bill at the end of the tax year.
The amount that you’ll pay in property taxes depends on the rate set by your local government, your state and the total value of your home. Select state governments also charge a mortgage recording fee, which is typically included with your closing costs as a single payment.
Finding a Realtor
A realtor is a real estate agent who’s an expert in your local housing market. In order to qualify as a realtor, an agent must demonstrate expertise in the market he or she works in and they must adhere to a strict code of ethics.
Working with a realtor can help you get a more objective opinion on homes in your area and can help you submit the strongest possible offer letter when you find the home that’s right for you. A realtor can also use his or her extended network to provide you with access to homes that aren’t listed on standard real estate sites.
Finding a House
Now it’s time for the most fun part of the home buying process — finding the perfect property. If you’ve never shopped for a home before, it’s easy to become overwhelmed by the number of options available to you.
It can help to create a list of “must-haves” for your future property to narrow down your search. Some of the factors you might want to consider when creating your list of the ideal home qualities may include:
- The number of bedrooms you need and your future family plans
- Local school ratings
- Your needs for your home’s yard and exterior
- The amount of upgrades and repairs you can afford to complete after purchase
Be sure that you have the following before you start house hunting:
- A preapproval for a mortgage loan
- A Realtor who can help you find the right home
- A rough idea of how much you can afford to take out in a mortgage loan
Finding a Mortgage Lender
Your mortgage lender is a bank or online lending company that will provide you with your mortgage loan. The lender you choose to service your loan will dictate the types of loans that you have access to and what you’ll pay in interest on your loan.
Consider a few of our top choices for borrowers below.
Move Into Your First Home
Making the jump from renting your space to owning your own home can be daunting. Thankfully, you don’t need to take on the home buying process alone.
Keeping in close contact with both your mortgage lender and your realtor can help you find the perfect property with less stress. Make contact with potential lenders and realtors today to get started.
Frequently Asked Questions
How does a mortgage work?
When you get a mortgage, the lender agrees to lend you a certain amount of money to purchase a property. In return, you agree to pay back the loan with interest over a specific period, usually 15 to 30 years.
How much can I borrow for a mortgage?
The amount you can borrow for a mortgage depends on various factors, including your income, credit score, and the property’s value. Usually, lenders consider your debt-to-income ratio to determine the maximum amount they can lend you.
Can I refinance my mortgage?
Yes, you can refinance your mortgage. Refinancing involves taking out a new loan to replace your existing mortgage. It is often done to secure better interest rates, lower monthly payments, or change the loan term.
Get Ready for Take Off
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