Buying a home is more than just the home search, and for many, the concept of a mortgage can feel very overwhelming. Start your hunt for your dream home confidently with these mortgage basics.
Conventional loans are by far the most popular loan type, offering lots of options for homebuyers. These loans can be used for primary and secondary residences, as well as investment properties. Down payments can range from as little as 3% down for a first-time homebuyer to 20% down for more seasoned investor loans. Typical conventional loans require higher FICO scores, and some reserves for underwriting approval.
A popular choice, Federal Housing Administration (FHA) loans offer a low down payment and credit score requirements. With down payment options as low as 3.5% and a credit score of just 580, FHA loans allow buyers with lower down payments and less than ideal credit scores to secure flexible financing with federally backed loans. FHA loans have lending limits depending on the type of property being purchased, but recent changes have increased these caps.
The U.S. Department of Veterans Affairs (VA) also offers VA loans to qualified service members and their families. These loans allow veterans to secure home loans with advantageous terms, often without a down payment. Prospective borrowers must receive a certificate of eligibility from the VA before applying for a loan.
Fixed versus Adjustable Rates
Fixed-rate loans are pretty straightforward—you’ll pay a fixed interest rate for the entire life of the loan. This offers a predictable monthly payment, making budgeting easier and consistent.
An adjustable-rate loan means your monthly mortgage payment will vary based on several factors. These loans typically begin with a lower rate at the start, increasing periodically based on market conditions and time.
Other Things to Keep in Mind
- If you’re concerned about your credit score, there are plenty of options to improve your FICO score and help lock down better financing.
- An escrow account lets you set aside a specified portion of your monthly payment in order to pay your taxes and insurance, rather than paying these semi-annual or annual expenses in large lump sum. Utilizing an escrow account can increase your monthly payment, but it’s beneficial for many buyers.
- Private mortgage insurance (PMI) is required for borrowers putting less than 20% down. This cost can either be added to your monthly mortgage payment, paid upfront at closing or a combination of both.
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