Regardless of how much HGTV you binge (not judging), the homebuying process, and all the decision-making that comes with it, can be complicated. You might have the perfect subway tile picked out for the backsplash of your dream kitchen, but have you narrowed down which mortgage is right for you?
Whether your budget is more “Fixer Upper” (RIP) than “Million Dollar Listing,” your perfect mortgage does exist! Check out all the different types of loans, rates and sizes below before deciding which is right for your new home budget.
Types of home loans
Conventional mortgages are kind of like the #basic babe of the bunch. They have fairly strict requirements when it comes to your credit score, the minimum down payment you need and your debt-to-income ratio, which measures whether you already owe more than you can probably handle.
These loans are different from other types of loans because they are issued by private banks and aren’t guaranteed or insured by the government. Conventional mortgages are ideal for people who have good to great credit scores, so if you’ve got a weak credit score, keep reading.
And if you’re not sure about your credit score, check yours on MyBankrate now.
For borrowers who can’t get approved for conventional loans, the government will likely do you a solid in the form of a FHA mortgage. FHA mortgages are backed by the Federal Housing Administration, and they are ideal for people who can’t afford the standard down payment or who have less than stellar credit. Often, the minimum down payment for FHA loans is 3.5 percent. They’re also often one of the only options for people with high debt-to-income ratios, meaning their monthly mortgage payments will likely take up a big slice of their take-home pay.
Still, this type of mortgage isn’t available to just any wannabe homeowner. To qualify for a FHA mortgage, you’ll have to meet certain requirements, which include v. important things like steady employment history, the ability to pay it off every month and financial soundness.
A 3.5-percent minimum down payment sounds like #goals, doesn’t it? Here’s the thing about FHA loans, though: You’ll get slapped with some pretty hefty mortgage insurance premiums, and you’ll pay more on your monthly payments than you would with conventional loans. Homebuying, meet buzzkill.
Millions of active military members and veterans are eligible to receive a Veterans Affairs mortgage, as are many reservists and National Guard members. VA mortgages are made through private lenders and guaranteed by the Department of Veterans Affairs, plus they offer some pretty nice perks.
VA loans don’t require a down payment, and you won’t have to pay mortgage insurance. The result? Seriously sweet savings when it comes to your monthly payment, which you can then stash in a savings account for next time.
People taking out a VA loan will likely have to pay a one-time funding fee, which varies. And while you still need to show that you can make your payments and don’t have any excessive debt, the guidelines for VA loans are typically more flexible. This is a great option for service members, their families and veterans, because those savings earned through serving are more than deserved.
Fixed-rate or ARM?
Now that we’ve hashed out some different mortgage options, we can talk about the two primary categories of home loans, starting with a fixed-rate mortgage. For many people, this might be a good fit.
With a fixed-rate mortgage, your monthly payments won’t change, because the interest rate won’t change for the life of the loan. Simple, right?
However, adjustable-rate mortgages (more to come on those!) typically have lower interest rates than those that are fixed, making this decision not as simple as it sounds. Ugh, life.
For fixed-rate mortgages, you can choose between a 30-year or 15-year loan term, and each comes with trade-offs. For the 30-year, the monthly payments are lower, but your interest rate is higher. For the 15-year, the interest rate is typically lower, but the monthly payments are higher because you have a shorter time to repay the loan.
Moving in five years? An adjustable-rate mortgage (ARM) features a fluctuating interest rate, which can definitely keep you on your toes.
Since the interest rate on your ARM can go up or down after the intro period, so can your monthly payments. Typically, when you first take out an ARM, your interest rate will be lower than you’d have with a fixed-rate mortgage, and the rate is even fixed for the first few years. You can get a 5/1 ARM, meaning that the low, introductory monthly payment stays that way for five years, but then can change every year after that. Lenders might also offer 3/1, 7/1 or 10/1 ARMs.
After the introductory period of your ARM ends, who calls the shots on the rate? The interest rate on your ARM is tied to the movements of another interest rate, called the index (like, why can’t anything be simple!?).
There are many different indexes out there, which are swayed by certain market forces out of your control, but I won’t bore you with the deets now. What you should remember, though, is that your loan paperwork will identify which indexes your ARM follows, so pay attention to that.
Size of loan
Next up: You need to consider the size of the loan you’re interested in taking out.
A conforming mortgage is the most common, and it follows the guidelines set by Fannie Mae and Freddie Mac. I know, they sound like Instagram influencers—but they’re not. Fannie Mae and Freddie Mac are the two government-sponsored enterprises that buy mortgages on the secondary market and package them as mortgage-backed securities.
That sounds kind of confusing, I know. Bottom line is that in order for Freddie and Fannie to buy a mortgage from a bank, it needs to meet certain requirements, including size. So these two are really calling the shots.
Based on Freddie’s and Fannie’s guidelines, the current conforming mortgage limit for a typical home is $424,100, in most counties. Think you can afford more house than that? Keep reading.
If you want to go big in order to go home (see what I did there?), you might want to look into a jumbo mortgage. Jumbo mortgages consist of loans whose size surpasses the maximum limit set for conforming loans by Freddie or Fannie. In most counties, a jumbo mortgage will be one consisting of more than $424,100.
To qualify for a jumbo mortgage, you’ll need almost flawless credit, sufficient income, assets and a limited amount of debt. Something to strive for, ya know?
If you’re in major house-hunting mode after all that mortgage talk, shop the best rates in the table below! Even if you’re on Team Rent for a bit longer, it doesn’t hurt to sneak a peek at some of the best rates and start planning for the future. Knowledge = power.