Once you find your dream home and make an offer on it, it’s time to apply for your new mortgage loan. Getting the right home loan is essential to your financial stability and lasting success when it comes to owning your new home. That’s why it’s important to understand how mortgage loans work, what types of mortgages are out there, and how each type of mortgage is different. Let’s look at the basics so you can feel confident in choosing the right one, while understanding your mortgage completely.
What is a mortgage?
In legal terms, a mortgage is the pledging of property to a creditor as security for the payment of a debt. Plainly, a mortgage is a loan. For many people, it’s the biggest loan they will ever borrow. With a regular loan, there isn’t any specific collateral. The lender looks at your credit history, your income, and your savings, and determines if you’re a good risk for a money loan. With a mortgage, the collateral for the loan is the house itself. If you don’t pay back the loan, along with all of the fees and interest that are included with it, then the lender can take your house.
Banks are the traditional mortgage lender. You can either apply for a mortgage at the bank you use for your checking and savings accounts, or you can shop around to other banks for the best interest rates and terms. If you don’t have the time to shop around yourself, you can work with a mortgage broker, who examines a bunch of different lenders to negotiate the best deal for you.
Like other loans, mortgages carry an interest rate, either fixed or adjustable, and a length or term of the loan, anywhere from five to 30 years. Unlike most other loans, mortgages carry a lot of associated costs and fees. Some of those fees only happen once, such as closing costs, while others are tacked onto the mortgage payment every month.
Understanding mortgage options
Most mortgages are made up of the same core elements — principal, interest, monthly payments, and so on — but different types of home loans have their own unique conditions you should know about.
1. Conventional mortgages. These are the most common mortgages taken out by U.S. homebuyers and homeowners. Conventional mortgages are typically available only to people with good credit. The minimum credit score to qualify for a conventional loan is typically around 620. These mortgages require private mortgage insurance if the down payment amount is less than 20% of the home’s purchase price. There are two main types of conventional loans: conforming and nonconforming.
2. FHA loans. FHA loans are guaranteed by the Federal Housing Administration and are designed to benefit first-time homebuyers and those with lower or middle incomes. The guidelines for FHA loans are less strict than for conventional loans: They require a lower minimum credit score to qualify — usually around 580. The minimum down payment for an FHA loan is 3.5% of the loan amount. But again, any down payment under 10% of the purchase price will require you to pay a mortgage insurance premium (MIP) for the entire life of the loan, which can get pricey depending on the length of your term.
3. VA loans. VA loans are guaranteed by Department of Veterans Affairs and are available to active service members, veterans, and some surviving military spouses. VA loans offer major benefits. They require no down payment or mortgage insurance, but borrowers do pay an upfront funding fee. The fee typically ranges from 1.25% to 3.6% of the total amount of the loan, depending on your down payment amount and whether it’s your first VA loan.
4. USDA loans. USDA loans are mortgages for rural and suburban homeowners that are guaranteed by the United States Department of Agriculture and require no down payment and no private mortgage insurance. You’ll have to pay an upfront guarantee fee of 1% of the loan amount and an annual fee of 0.35%, but these costs are generally more affordable than paying for mortgage insurance. There are income limits to qualify, so you won’t be able to take out a USDA loan if your household earns too much.
5. Second mortgage. A second mortgage, also known as a home equity line of credit (HELOC), is a loan on a home that already has a primary mortgage. It allows you to tap the equity, or value, you’ve built up in your home to cover expenses such as home improvements or your kid’s college tuition. If you can’t make your mortgage payments, your lender will be able to foreclose on your home and sell it to recoup the company’s losses.
Securing a mortgage is one of the most important financial decisions most consumers make in their lifetimes. It’s critical to have the facts you need to make an informed decision, as it’s vital in understanding your mortgage and how it works.
If you have questions and you need help, please contact us.
American Star Mortgage has helped many first-time homebuyers across Southern California find the perfect home loan. With years of mortgage experience, our team prides itself on assisting our clients in understanding all the elements of the refinancing process. Contact us at (844) 880-6296 or email us at [email protected].