Mortgages have three elements: a loan type, a rate type and a term. Knowing how these pieces work together can help you pick the best mortgage for you.
A mortgage's type depends on if a government agency or private investors are involved, as well as the amount of the loan.
An FHA mortgage is a home loan insured by the Federal Housing Administration. FHA loans are backed by the government and designed to help borrowers with lower credit, FHA makes it possible to buy a house with a score of just 580 and only 3.5% down. Note that FHA loans require mortgage insurance to protect lenders against losses that result from defaults on home mortgages. You’ll be able to finance the upfront mortgage insurance premium into your loan. You will also be responsible for paying an annual premium.
A conventional mortgage is a loan that's not backed by a government agency conventional loans are available with a down payment as low as 3%. They are a bit harder to qualify for, but they typically cost less over time than an FHA loan. You can avoid paying private mortgage insurance if your down payment is 20% or more. This can save you hundreds of dollars on your monthly mortgage payment.
VA loans are mortgages backed by the Department of Veterans Affairs and are exclusively for veterans, eligible surviving spouses and active-duty service members. VA loans offer the opportunity to buy a home with no down payment or private mortgage insurance.
Jumbo home loans are mortgages that exceed the conventional loan limit. This simply means that you'll need a jumbo mortgage if your loan amount is between $484,351 and $3 million.
There are two kinds of mortgage rates – fixed and adjustable – and you can pick the type of rate that matches your goals. A fixed-rate mortgage will stay the same for the life of your loan. This option keeps your month-to-month mortgage payment consistent and predictable. This is a great option for homeowners who plan to stay in their new home for a long time and want a regular payment to budget around. An adjustable-rate mortgage will stay the same for the first 5, 7 or 10 years of the loan. Then, your rates will adjust up or down once per year depending on market conditions. An adjustable-rate mortgage offers the opportunity to get the lowest rate possible and is a good choice for homeowners who plan on moving or refinancing before the initial fixed-rate period ends.
A mortgage term is the number of years you have to pay off your mortgage. A 15-year term means you have 15 years to pay off your mortgage, and a 30-year term means you have 30 years. You have a payment due each month. A 30-year term normally has lower monthly payments than 15-year mortgages since your total mortgage balance is spread out over a longer period of time, resulting in smaller monthly payments. A shorter term means your balance is spread over a shorter period of time, making your monthly payments higher.
A pre-approval shows you’ve spoken to us, provided initial documentation, set your budget and considered the next steps. This can give you an advantage over other home shoppers in a competitive market. You and your real estate agent will understand what you can afford so you don't waste time looking at homes outside your budget. You'll be in the best position to make a strong offer on a house because the seller will know a lender already verified your finances. After your offer is accepted, you're less likely to run into surprises that could slow down closing the loan.
Keep in mind an approval is just the start of getting a mortgage. Once you find a house and make an offer, the house will need to pass inspections and be appraised by a third-party. Your approval amount could also change if your financial situation changes.
When it comes time to actually purchase a home, working with a real estate agent can make a huge difference. A buyers agent will take the time to help you find the right home and place you on the path of homeownership.
your agent will help you find the right house. Agents have access to the MLS database, which means they know what homes are on the market, what features they have, and what they're listed for.
When you're ready to make an offer, your real estate agent can help you get in touch with the seller and submit the offer in writing. Realtors usually have a variety of standard forms (including Residential Purchase Agreements) kept up to date with the changing laws.
Once your offer has been accepted, closing the loan involves three stages: the home inspection, the appraisal and underwriting. Knowing how these pieces work together can help you prepare to close your loan.
Real estate closings can be fraught with complications and setbacks, but they can go smoothly and quickly if planned for carefully. The biggest thing you can do to make sure you don't run into problems is to avoid any major financial changes or spending. Don't apply for new credit lines or loans, and don't make purchases that will deplete your assets. You can do these things after your loan closes. Taking on new debt changes your debt-to-income ratio (DTI), a key factor in determining the loan amount you can get approved for.