When you are ready to buy a home, you have to do more than pick out the right house. You also have to pick out the right mortgage program. This could be harder than agreeing on a home with your spouse – there are so many choices!
Keep reading to learn how to distinguish between the programs to determine what’s right for you.
How Long are you Staying?
One of the first questions you should ask yourself is how long you plan to stay in the home. Is this a temporary purchase? Or do you see yourself staying for many years? This will play a role in which program is best for you.
If you think this is a temporary place to live, consider the ARM or adjustable rate mortgage program.You’ll get the lowest interest rate for the introductory period. This means you’ll pay less interest during the time you have the loan. In other words, you’ll have a lower monthly payment. Be careful, though, make sure you plan to move before the introductory rate expires and you have an adjusted rate. Your plans to save money could get blown out of the water if you stay too long.
If, on the other hand, you think you’ll stay put for a while, a fixed rate mortgage may be best. Yes, you’ll pay a higher interest rate initially, but you get the benefit of a fixed rate for the term of the loan. You don’t have to worry about increasing interest rates and payments down the road. The predictability is often the best bet for those that plan on staying.
What’s Your Credit Like?
Once you choose between a fixed rate and adjustable rate, it’s time to choose the actual program. You have the FHA, VA, USDA, and conventional program to choose amongst.
Starting with your credit score, you can start to narrow down your available mortgage programs. If you have a high credit score, you may be eligible for all of the programs. If, however, you have a lower credit score, counting out the conventional program is a good idea. Usually, you need credit scores of at least 680 or higher (in most cases higher) in order to qualify. If you have say a 640, you can just move on from that program.
FHA loans are often the best alternative for those that have less than perfect credit. The guidelines for this program are flexible, giving you room to have ‘less than perfect credit.’ The VA and USDA loans are also plausible options, however you must be a veteran for the VA loan, and you must buy a rural home for the USDA loan. That leaves the FHA loan for the typical low credit score borrower.
How Much Money Will you Put Down?
This is another important factor. The down payment controls which mortgage program you can choose. Conventional loans do allow down payments lower than 20%, but then you’ll pay PMI. If you have a great credit score, though, this could be the best option for you even without 20% down.
If you only have 3.5% to put down, you’ll want the FHA loan. They allow this low down payment and low credit score. You’ll pay for this benefit in the form of an upfront mortgage insurance fee and annual mortgage insurance, but it’s worth it. If you only have a 3.5% down payment and a low credit score, conventional loans won’t be an option for you.
Don’t panic if you don’t have any money to put down though, there are still options. If you are a veteran, the VA loan doesn’t require a down payment. If you aren’t a veteran, but will buy in a rural area, the USDA loan doesn’t require a down payment either. However, with the USDA loan, you cannot make more than 115% of the average income for your area in order to qualify.
When you shop for a mortgage, you’ll have to determine which program and then what type of rate. It’s a lot of decisions to make! We recommend that you obtain several quotes from each lender. For example, if you are a veteran, but you have great credit scores and money to put down on the home, get a quote for the VA loan and the conventional loan. This way you can compare costs and rates to see which one suits you the best.
You can also ask for quotes for both a fixed rate and an adjustable rate if you are unsure of which route to take. Sometimes borrowers that know they will stay want to take the gamble on the ARM because of the vast savings the introductory rate offers. Other times, borrowers that know they will move don’t want to take the chance and would rather have the comfort of a fixed rate.
Everyone has their own preference for the mortgage program that works for them. Just make sure you shop around and look for the best rate and costs in order to secure the best deal.