So you’re thinking about buying a first home. That’s so exciting! Buying a new house is a big deal, and everyone here at True Homes is really happy for you!
A big part of being first-time home buyers is getting a first-time home mortgage. We know the process can be a little overwhelming – OK, a lot overwhelming – so we thought you might appreciate a home mortgage 101 to explain the different kinds of mortgages.
Wait, you mean there are different kinds?! There are lots, actually, but that’s a good thing because it means that if you don’t qualify for one mortgage, there are others you can try. By the way, don’t feel unintelligent if you haven’t heard about these. Unless you’re in the thick of buying a new house or you work in the real estate industry, there’s no reason you would ever pay attention to this kind of information.
So, let’s get started!
Conventional mortgages. These are mortgages you get on the commercial market from a bank or other regular lender. Typically, a conventional mortgage will require a down payment of at least 20 percent of the sale price of the house. Conventional loans are not insured or guaranteed by the federal government in any way. That sets these mortgages apart from the three government-backed mortgage types: FHA, VA, and USDA. The other thing to know about conventional financing is that each lender can set its own criteria for approval, within certain guidelines.
FHA mortgages. FHA stands for Federal Housing Administration, which is part of the Department of Housing and Urban Development (HUD). FHA loans often are suggested to first-time home buyers or any buyer who doesn’t have at least 20 percent for a down payment. If you don’t have much credit history or your credit isn’t that great, an FHA loan may be a good option for you. Here is information on the FHA program. Banks consider these loans to be riskier, so the government insures the lender against a loss if the borrower doesn’t make the payments and defaults on the loan. FHA has some strict qualification guidelines, both about the house and the borrower.
With an FHA loan, you can make a down payment of as little as 3.5 percent of the purchase price. The down side is that you’ll have to pay for mortgage insurance, which is both a one-time upfront premium payment and a monthly payment. FHA changed the rules about mortgage insurance in 2017; here is information about those changes.
VA mortgages. If you are a member or a veteran of the military, including the Reserves or the National Guard (or a survivor), you definitely want to look into a VA loan. These are similar to FHA loans, which means they are guaranteed by the federal government. The big advantage of a VA loan is that it is 100 percent financing. That means service members can buy new homes with no down payment at all. (Of course, the more you put down, the lower your payment will be.) Here is eligibility information.
USDA / RHS Loans
There’s one more zero-down mortgage option: the United States Department of Agriculture (USDA) loan program. This program is for rural borrowers who meet certain income requirements. You might be surprised at what areas qualify as “rural” for this loan program. Plug in the address of the house you want to buy on this website to see if it is eligible.
Now that we’ve covered the major sources of mortgage funds, let’s talk about three types of mortgages: fixed-rate, adjustable-rate, and jumbo.
Fixed-rate mortgage loans. A fixed-rate mortgage will have the same interest rate for the entire term of the loan, which gives you predictability. Your monthly payment could go up or down if your property taxes and/or homeowner’s insurance premium change, but the interest rate on your loan will never change. In the years since the housing market crashed, the majority of mortgages are fixed-rate loans; if you’re planning to live in your house for many years, a fixed-rate mortgage could be the right choice for you. Read about the pros and cons of fixed-rate loans.
Adjustable-rate mortgage loans. Commonly known as ARMs, these loans have an interest rate that will change over time. Usually, it has a fixed rate for a period of time, such as five years, and then will change on a pre-arranged schedule, such as once a year. Since these are riskier loans, buyers are “rewarded” with a low initial interest rate. For buyers who think they may sell the house fairly soon (or will refinance), an ARM may be a way to have a lower monthly payment or quality to buy a more expensive house. Read about the pros and cons of adjustable-rate loans.
Jumbo loans. This requires a bit of explanation. Each year Fannie Mae, Freddie Mac, and their regulator, the Federal Housing Finance Agency, set a maximum amount for loans that they will buy from lenders. Wait! Somebody buys mortgages from lenders? The very brief answer to this very complex question is this: Fannie Mae and Freddie Mac are government-controlled companies that buy loans from lenders, bundle them together, and sell mortgage-backed securities to investors.
The only reason this matters to you is that the loan limit for the loans Fannie and Freddie will buy (these are called conforming loans) generally is $417,000. However, banks are allowed to exceed these loan limits; those loans are called jumbo loans. Banks usually require jumbo borrowers to have excellent credit and larger down payments than with conforming loans. The interest rates normally are higher too. If you’re a first-time home buyer with True Homes, you probably don’t need to spend even a minute thinking about jumbo loans.
That’s a general overview of the types of mortgages available to home buyers in 2017. We hope it’s been helpful. Our True Advisors can answer many of the questions you might have about mortgages and can connect you to True Homes preferred lenders, who are there to help make your dream of buying a house come true!