A home mortgage loan is a huge financial decision, and it’s important to understand the basics before you apply. In this article, we will discuss the four types of home loans, how to qualify for a conventional mortgage loan, your down payment, closing costs, fixed-rate vs. variable-rate mortgages, purchasing points, and more.
The Four Types of Home Mortgage Loans
There are four types of home mortgage loans, including a conventional loan, an FHA loan, a VA loan, and a USDA loan.
Conventional Home Mortgage Loan: A conventional home mortgage loan is a standard, fixed-rate, 30-year loan that’s backed by Fannie Mae or Freddie Mac.
FHA Home Mortgage Loan: An FHA home mortgage loan is for first-time buyers in the US and people with low credit scores. These are supported by the Federal Housing Administration.
VA Home Mortgage Loan: A VA home mortgage loan is for veterans and military families who have served in the US. VA loans are supported by the Department of Veterans Affairs.
USDA Home Mortgage Loan: A USDA home mortgage loan is a government-backed program to assist rural residents with low or moderate-income. These are guaranteed by the United States Department of Agriculture (USDA).
Qualifying for a Conventional Home Mortgage Loan
In order to qualify for a conventional home mortgage loan from your lender, you must possess certain credit score qualifications that vary depending on whether you’re buying or refinancing a house. For example, if you plan to buy an existing property as opposed to building one from scratch, your credit score must be 620 or higher.
Have all of your documents in order, including all proof of income and expenses. The bank will want copies of paystubs, bank statements, credit card statements, loan statements, tax returns, and verification of any other money coming in or going out. The longer it takes you to get the documentation together, the longer it takes to get approved.
Your Down Payment
In addition to your down payment, you’ll also need to budget for closing costs, which can range from around $500 to over $5000, depending on the property and your lender. Closing costs generally include items such as application fees, credit report charges, inspection fees, title search fees, and more.
Earnest Money Deposit
When you make an offer on a property, you’re required to pay what’s called an earnest money deposit. This is a sum of money (usually one to three percent of the home’s value) that’s deposited with the seller to show your good faith in the purchase. If you back out of the deal, this money goes back to the seller.
Opening an Escrow Account
Fixed-Rate vs. Variable Rate
When considering a conventional home mortgage loan, you’ll need to decide whether you want a fixed-rate or variable rate. A fixed-rate loan is one wherein your interest rate and monthly payments will never change, while a variable rate could go up or down based on market conditions.
The Life of the Loan
How Your Mortgage Payments are Divided
The Importance of Shopping Lenders
One of the most important steps in securing a home mortgage loan is shopping around for the best lender. Not all lenders are equal, and some may offer better terms than others.
In fact, it’s the lender who determines your closing costs, the majority of which are lender fees. By comparing rates, fees, and other loan features from different lenders, you can ensure that you’re getting the best deal possible on your home mortgage.
Why You Need to Get Pre-Approved
Before you even start house hunting, it’s important to get pre-approved for a mortgage loan. This will show sellers that you’re a serious buyer and could speed up the process of getting your offer accepted.
It’s important to understand the different types of loans available. Your down payment is one of the most important factors when securing a mortgage. Closing costs are another important factor to consider when taking out a mortgage. It’s also important to understand the life of the loan and how your monthly payments are divided. Shopping around for a lender is essential, as is getting pre-approved for a mortgage.
By following these tips, you’ll be well on your way to securing the perfect home mortgage loan for you.