Are you gearing up to buy a home, but have some lingering questions surrounding how to pick the mortgage that’s right for you? The process can feel intimidating, for sure, but a bit of knowledge can help settle your nerves. We’re covering some of the basic ins and outs as well as things to be on the lookout for, so you can settle on the home mortgage that is going to best fit your needs.
Understanding What A Mortgage Is
In basic terms, a mortgage is when you borrow money from a bank or other lender in order to purchase a home. Many people are unable or unwilling to purchase a new home paying all cash, and it’s typical to pay some sort of down payment while borrowing the rest—the mortgage—which you pay off over time while also paying a set amount of interest. Fortunately, interest rates are not typically outlandish, and right now they can even be pretty low. It’s not unheard of to get an interest rate these days that is below three percent, a small number when you consider just how much most people will need to borrow to buy a house. A mortgage loan is also considered secured debt, making it an even more ideal type of loan.
What Types Of Mortgages Are Out There?
If you are new to the process, you might be surprised to learn that there are different types of mortgage loans. Here is a roundup of some of the most common ones that you should know about [1]:
- Conventional Mortgages
A conventional mortgage is almost exactly what it sounds like: the most common, traditional mortgage. It refers to a loan for a buyer with good credit, savings, and the ability to put down at least 3.5 percent in a down payment.
- Conforming Mortgage Loans
A conforming loan is one that conforms to maximum loan limits that the federal government sets, though the limits can be different based on where you live.
- Non Conforming Loans
Conversely, non conforming loans are those that do not conform to loan boundaries, and therefore can’t be sold or bought by Fannie Mae or Freddie Mac, the two government-backed groups that buy and sell most of the home mortgages in America.
– FHA Loans
For low-income buyers, the Federal Housing Administration offers FHA loans when it becomes difficult to acquire a loan elsewhere, sometimes requiring as little as 3.5 percent down.
– VA Loans
The Veteran Affairs Department assists veterans is purchasing homes, offering mortgage loans with no money down in some instances.
– USDA Loans
For low income buyers in rural areas, the United States Department of Agriculture offers loans to make home ownership more possible. These loans ask little to no money down, so long as certain other requirements are met.
What To Look Out For
This is obviously a big decision, so there are a number of key things to keep in mind. Asking the following questions will go a long way to ensuring that you walk away educated on the process you are getting yourself into [2]:
- How long of an interest rate lock should you get?
- How long will the approval process take?
- How many people will need to get involved (lawyers, underwriters etc)?
- What is the schedule of events (ie appraisals, inspections, closings)?
- What fees and commissions will be charged?
When speaking to your lender, you should be able to use them as a source of education, but you don’t want to blindly accept what one person is telling you. This is where comparing different lenders can come in handy.
Comparing the Different Offers
Once you get started, it is important to shop around. You don’t want to take the first offer you get just because you fear you won’t get any other offers on the table. Cost compare, talking to at least a couple different lenders and banks to learn about their interest rates, fees and payback schedules. This way you can choose the mortgage offer that works best for you. You can also often use competing offers as a way to negotiate down your interest rate, saving you some hard earned money. The diligent borrower is often the one who gets the best deal, so be smart, shop around, and negotiate costs down when possible.
If This Is Your First Time
If you’ve never applied for a mortgage loan before, you might worry about your ability to be an attractive client to a bank or lender. But you should set those worries aside. There’s no reason being a first time borrower should put you at a disadvantage, but there are some things to keep in mind. First, get your financial paperwork in order so that the process goes more smoothly. And take a moment to focus on your credit score. If you feel it’s a bit too low, take some time to work at bringing it back up. And talk to prospective lenders about any questions you might have, discussing any concerns you might have as a first time mortgage borrower. Everyone has to start somewhere; don’t let the fact that you’ve never taken out a home mortgage before deter you.
Also, consider incentive programs designed to help first time borrowers. There are federal and state programs that financially assist some buyers the first time they take out a home mortgage, so ask your lender about these options.
Final Thoughts
If you have been thinking for a long time about taking out a home mortgage, hopefully we have shed some light and answered some of your most pressing questions. It’s a major financial decision, and not one that you should make without careful thought and consideration. With the right info, however, you can feel confident that you are entering the mortgage loan process in a manner that will set you on the road to success.
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