Mortgage 101: Which Mortgage Is Right for You?

Posted by Laine Smith on 1/9/17 10:06 AM

Topics: Conventional Loans FHA Loans VA Loans Credit Score First Time Home Buyer USDA Loans Loan Types Mortgage Insurance home buying Mortgage Rates Down Payments

Buying a home can come with an overwhelming amount of choices. What school district do you want to purchase in? Who should you choose for a real estate agent? How much can you afford to spend on your home purchase? Just like choosing a home style, there are several loan types and programs made to benefit a wide range of homebuyers.

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Determining what loan type is best for you depends on several factors, including your income, debt, property type, reserves, down payment, credit score, etc. Here are a few of the most common types and their benefits.

FHA

Good for borrowers with a low down payment, lower credit score

FHA loans are often referred to as the “first-time homebuyer loan”, specifically because of their low down payment requirement. An FHA loan’s 3.5 percent down payment requirement can come from the borrower’s own funds, can be gifted by a family member or come from a grant from a state or local government down payment assistance program.

Compass Mortgage has the ability to finance FHA loans to eligible borrowers with credit scores as low as 560 (with a higher down payment requirement). FHA loans also allow borrowers with limited credit to build credit histories with non-traditional trade lines, such as utility payment records, cell phone payments, rent, etc.

USDA Rural Development

Good for borrowers in rural areas with limited funds for a down payment

Arguably the biggest benefit of the USDA Rural Development program is the zero down payment requirement. The USDA program also provides the same credit history flexibility as FHA, but does require a minimum credit score of 640 as of December 1, 2014.

Though you don’t have to specifically live in a “rural” area to qualify for a USDA loan, you must live in a smaller town – typically somewhere with a population less than 20,000 – to be eligible. To see if your area is eligible for USDA financing, click here.

VA

Available to eligible service men and women

In 2016, the U.S. Department of Veteran Affairs guaranteed more than 707,000 home loans, making it the largest year in the history of the VA loan program.

VA loans have several benefits including the zero down payment requirement, a lower-than-market interest rate, no private mortgage insurance requirement, and a cap on the amount of closing costs borrowers can incur.

The U.S. Department of Veteran Affairs says that the VA loan program has “been the safest on the market since the housing crash”.

Conventional

Good for borrowers with good credit scores and funds for a down payment

The three previous loan types are funded or guaranteed by the government, whereas a conventional mortgage must adhere to the guidelines set by Fannie Mae and Freddie Mac.

The minimum down payment required for conventional financing is 3 percent, but a higher down payment and a higher credit score can get you a more competitive interest rate and private mortgage insurance rate.

Fixed vs. Adjustable

Conventional loans give borrowers the option to choose between a fixed-rate or and adjustable-rate mortgage. A fixed-rate mortgage is a loan in which the same interest rate is charged over the life of the loan, meaning borrowers have a fixed principal and interest payment for the life of their loan.

An adjustable-rate mortgage (ARM) has an interest rate that initially begins at a low interest rate and then fluctuates between one and two points per year over a specified time period. For example, a 10/1 ARM has a set interest rate for 10 years and then adjusts for 20 years. There is typically a yearly cap and/or lifetime cap that the rate can increase.

These loan types are just a few among many. To learn more about what type of home financing is right for you, contact one of our mortgage bankers for a pre-approval and download our free Mortgage 101 Handbook for a more extensive list of programs.

Download: Mortgage 101 Handbook

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