Homebuyers have more mortgage options than they sometimes realize. Choosing the right loan is not simply about finding the lowest advertised interest rate. The best mortgage depends on your credit, down payment, income, property, loan amount, future plans and overall financial goals.
During the pre-approval process, we can compare the mortgage programs available to you and determine which combination of loan type, interest rate structure and loan term makes the most sense.
Fixed-Rate Mortgage or Adjustable-Rate Mortgage?
One of the first decisions is whether a fixed-rate or adjustable-rate mortgage is appropriate for you.
Fixed-Rate Mortgage
With a fixed-rate mortgage, your interest rate remains the same for the life of the loan. Your monthly principal and interest payment therefore remains consistent, although your total housing payment can still change if property taxes, homeowners insurance or other housing expenses change.
Fixed-rate mortgages are often attractive to borrowers who value predictability or expect to keep the home and mortgage for a long period of time.
Common fixed-rate terms include 15, 20 and 30 years. A shorter term generally results in a higher monthly payment but allows the mortgage to be paid off faster and can reduce the total interest paid over the life of the loan.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage generally provides an initial period during which the interest rate is fixed. After that period, the rate can adjust periodically according to the terms of the mortgage.
For example, an ARM may provide a fixed interest rate for the first several years before becoming adjustable.
Once the adjustable period begins, the interest rate is generally determined using an index plus a specified margin, subject to the adjustment caps contained in the loan.
An ARM can sometimes offer attractive initial pricing, but borrowers should understand how frequently the rate can change, how much it can change at each adjustment and the maximum rate permitted over the life of the loan.
An ARM may make sense in certain situations, particularly when the expected time in the home or mortgage is relatively short. However, you should not choose an ARM solely because you expect to refinance or sell before the rate begins adjusting. Plans and market conditions can change.
Conventional or Government-Backed Mortgage?
Another important decision is whether a conventional mortgage or a government-backed mortgage provides the better financing strategy.
Conventional Mortgages
A conventional mortgage is a loan that is not insured or guaranteed by a government agency.
Many conventional mortgages follow guidelines established by Fannie Mae or Freddie Mac. Conventional financing can offer a variety of down payment options and may be particularly attractive to borrowers with strong credit and financial profiles.
If the down payment is less than 20%, conventional financing may require private mortgage insurance. The cost of that mortgage insurance can vary based on factors such as credit score, down payment and the characteristics of the loan.
Conventional financing can also include programs specifically designed for eligible borrowers that offer reduced down payment requirements or other features.
FHA Loans
FHA loans are mortgages made by approved lenders and insured by the Federal Housing Administration.
FHA financing can be useful for borrowers with smaller down payments or credit profiles that may not receive the most favorable terms through conventional financing.
FHA loans generally include both upfront and annual mortgage insurance premiums, so it is important to compare the entire cost of FHA financing with available conventional alternatives rather than choosing a loan based only on the interest rate or down payment.
VA Loans
Eligible Veterans, active-duty service members and certain surviving spouses may have access to VA-backed mortgage financing.
VA loans can offer significant benefits, including the possibility of purchasing with no down payment for eligible borrowers with sufficient entitlement and no monthly mortgage insurance.
If you are eligible for VA financing, it is worth comparing a VA loan with your conventional and other mortgage options—even if you have excellent credit or enough savings to make a substantial down payment.
USDA Loans
USDA financing may provide another low- or no-down-payment option for eligible borrowers purchasing qualifying properties in eligible areas.
USDA loans include geographic and household-income eligibility requirements, so both the borrower and property must qualify for the program.
Conforming or Jumbo Mortgage?
The size of the mortgage can also affect which financing options are available.
Conforming Loans
Conforming mortgages are loans that meet applicable Fannie Mae or Freddie Mac requirements, including maximum loan amounts established for the area.
Conforming loan limits are updated periodically and can be higher in designated high-cost areas. Because these limits change, it is better to review the current limit for the property rather than rely on an old dollar amount.
Jumbo Loans
A jumbo mortgage generally refers to a loan amount that exceeds the applicable conforming loan limit and therefore does not qualify as a standard conforming mortgage.
Jumbo loan guidelines and pricing can vary considerably between lenders and programs. Depending on the program, borrowers may encounter different requirements for credit, down payment, reserves, debt-to-income ratios and property type.
For higher-priced homes, it can be worthwhile to compare jumbo financing with other available loan structures rather than assuming one particular mortgage is automatically the best choice.
What If You Don’t Fit Traditional Mortgage Guidelines?
Not every qualified homebuyer fits neatly into conventional, FHA, VA or USDA mortgage guidelines.
Some borrowers have strong financial profiles but unusual income, assets, property characteristics or ownership structures that make traditional mortgage financing difficult. In those situations, portfolio and Non-QM mortgage programs may provide additional options.
Portfolio and Non-QM Mortgages
Portfolio and Non-QM financing can provide greater flexibility for borrowers or properties that do not fit standard agency mortgage guidelines.
Depending on the program and borrower qualifications, these loans may offer solutions for situations such as:
- Bank statement programs for self-employed borrowers whose tax returns may not fully reflect the cash flow of their business
- Asset-based or asset-depletion qualification for borrowers with substantial liquid or investment assets but limited traditional qualifying income
- Large jumbo loan amounts that fall outside standard conforming or traditional jumbo programs
- Properties held in an LLC or other eligible ownership structures when permitted by the particular loan program
- Properties with large acreage or other characteristics that may not fit traditional agency guidelines
- Real estate investors who may qualify using the property’s rental income or cash flow rather than traditional personal income
- Self-employed borrowers, business owners and entrepreneurs with complex income or documentation
- Other unique borrower or property scenarios that do not fit neatly within conventional or government-backed mortgage guidelines
These programs are not a way to avoid demonstrating the ability to repay a mortgage. Instead, they may use different methods of documenting and evaluating a borrower’s income, assets, cash flow, property or overall financial strength.
Portfolio and Non-QM mortgages can also have different interest rates, down payment requirements, reserve requirements, fees and underwriting standards than traditional mortgage programs.
The important point is that being told you do not qualify for a traditional mortgage does not necessarily mean that home financing is unavailable.
If your income, assets, property or financial situation is unusual, it may simply require a different type of mortgage program.
What About First-Time Homebuyer and Down Payment Assistance Programs?
First-time homebuyers may have additional financing options available through conventional programs and state or local housing programs.
In Maryland, Washington DC and Virginia, there are programs that may provide down payment or closing-cost assistance to eligible borrowers. Some programs also offer specialized mortgage terms or reduced rates.
Eligibility can depend on factors such as income, purchase price, location, household circumstances and whether you meet the particular program’s definition of a first-time homebuyer.
Down payment assistance should be evaluated as part of the complete mortgage strategy. The amount of assistance is important, but so are the interest rate, repayment terms, potential second mortgage, restrictions and total cost of the financing.
Don’t Choose a Mortgage Based on the Interest Rate Alone
A lower interest rate does not automatically mean a mortgage is the better financial choice.
Interest rates can be associated with different discount points, lender credits and closing costs. Loan programs can also have different mortgage insurance, funding fees and other expenses.
When comparing mortgage options, consider the interest rate, points and fees, monthly payment, mortgage insurance, cash required at closing and how long you expect to keep the mortgage.
How Long Should Your Mortgage Term Be?
The traditional 30-year mortgage is popular because spreading repayment over a longer period generally produces a lower required monthly principal and interest payment than a shorter-term loan.
A 15- or 20-year mortgage can result in a higher monthly payment but may allow you to build equity faster and pay substantially less interest over the life of the loan.
The right term depends on your budget, financial priorities and how aggressively you want to repay the mortgage.
So, Which Mortgage Is Right for You?
There is no single mortgage program that is best for every homebuyer.
A borrower with excellent credit and a large down payment may find conventional financing attractive. Another borrower may benefit significantly from FHA financing. An eligible Veteran may find VA financing difficult to beat. A buyer purchasing in an eligible rural area may want to consider USDA financing, while a first-time buyer may benefit from a state or local assistance program.
Even two borrowers purchasing homes at the same price can have completely different optimal mortgage strategies.
That is why the pre-approval process should involve more than determining the maximum amount you can borrow. We can compare the programs you qualify for, explain the advantages and tradeoffs of each, and help you select financing that fits both the home you are buying and your longer-term financial plans.
Questions about which mortgage is right for you?
Call or text me at 240-670-5090 or email me at CJMT@mainstreethl.com.
