Home buying can be one of the biggest endeavors you can take on: it’ll entail patience and perseverance to find your ideal place. One aspect in the home buying process that is a challenge to navigate is applying for a mortgage loan. With the number of options available, it can get pretty confusing as to which loan would be the best one for you.

For your convenience, we’ve compiled a short list of the most common mortgage loans in the country. But before we go into that, get familiarized first with a few terms you might encounter when shopping for the right mortgage.

  • Interest Rate and APR (Annual Percentage Rate) – Generally speaking, these numbers (in percentage) show how much the loan will cost you.

  • Closing Costs – These are fees paid once upon closing of the transaction. They typically range between 2 to 5 percent of the purchase price and can include application, escrow and appraisal fees among others.

  • Down Payment – This is an early upfront payment used to secure a loan. A 20% down payment is the standard here, although this can vary depending on the type of loan you’re getting.

  • Qualifications/Requirements – These are prerequisites you need to comply with in order to be eligible for a certain loan. These include good credit standing, a certain income level or even the location you’re targeting.

  • PMI/MIP – these are types of mortgage insurance added when the down payment placed is lower than the standard 20%. While both the Private Mortgage Insurance and Mortgage Insurance Premiums can be paid upfront or monthly, the PMI is usually associated with more conventional loans.

4 Most Common Mortgage Loans

1. Federal Housing Administration (FHA) Loan

As the name suggests, an FHA loan is one that is backed by the FHA. With their low down payment requirement and more flexible credit criteria, these types of loans are hugely popular among first-time home buyers. While the down payment is lower than conventional loans, interest rates may be higher, so doing your research before committing to the loan will come in handy.

Qualifications: you must be of legal age, have a steady employment (same employer) for the past 2 years, have a property appraisal from a FHA-approved appraiser and the home to be purchased should be your primary home.

Down Payment: Unlike conventional loans that require a 20% down payment, you can qualify for the loan with a 3.5% down and a 580 or higher credit rating. If you fall short of the ideal credit score (500-579), you can still qualify provided you place a 10% down payment.

Interest: As a consequence of lower down payments and less strict credit criteria, the FHA loan requires borrowers to pay both the upfront and monthly MIPs for the property.

2. Veterans’ Affairs (VA) Loan

Similar to the FHA loan, the VA loan is backed by its namesake, the Department of Veterans’ Affairs. From the name itself, this type of loan is geared towards providing assistance to veterans or currently active servicemen and reserve members.

Qualifications: 90 continuous days of active service during wartime or 181 days of active service during peacetime. You’ve served 6+ years in the National Guard; or your spouse was a service member who died in the line of duty.

Down Payment: Eligible borrowers don’t need to place a down payment to get the home.

Interest: with a VA loan, you’re not required to pay a PMI. Instead, there is a VA funding fee which you pay one time. This is about 2.3% of the amount borrowed.

3. United States Department of Agriculture (USDA) Loan

Another government-backed loan is the USDA loan. The whole premise of this loan type is to help families in rural areas become homeowners. They believe that doing this “creates strong communities and a better quality of life“.

This loan is targeted for low-income individuals with less than ideal credit scores. One limitation is that you have to buy a home in a designated rural area in order to qualify. Now, to be clear, the term ‘rural’ doesn’t just refer to places in the middle of nowhere, but also includes some suburban areas close to big cities.

Qualifications: Among other things, you’re a US citizen of legal age, you fall under the “low income” bracket in your potential area and must live in the property as your primary residence.

Down Payment: Same as the VA loan, no down payment is required by the USDA. However, you’ll still need to cover for the closing costs.

Interest: Since USDA loans don’t require a down payment, you will have to pay insurance premiums (1-2% of the loan amount) which keeps the USDA loans program running.

4. Conventional Loan

The odd one out, a conventional loan is the only loan type here that isn’t backed by the government. This is generally the best route to take if you have the proper qualifications and credit rating to back you up.

Generally offering the most competitive interest rates and terms, conventional loans have the potential to afford borrowers with lower monthly payments compared to the other loan types mentioned above.

Qualifications: In order to qualify for a conventional loan, you must be of legal age, have a stable income, a good credit score, and have an acceptable debt-to-income ratio of less than 43%.

Down Payment: A sizable down payment (20% of the loan amount) is ideal although a range of 3-25% of the loan amount is accepted.

Interest: If your down payment is less than 20% of the loan amount, you will have to pay the PMI. However, this will be lower compared to that of the MIP associated with an FHA loan.

Moving Forward

Deciding on which mortgage loan to shop for all boils down to certain criteria that you can gauge on your own. Things such as credit score, ability to put up a certain down payment or even being in the military will greatly influence your choice.
Whatever the case, we hope that this article will be of help when the time comes to make that major decision.
TRUE Notary is here to assist and guide you as you execute your mortgage documents to completion. We provide closing services, such as notarial, signing and witnesses. Contact us today!