Choosing your mortgage is almost as hard as choosing the house you want to buy. The mortgage, just like your home, is something you will have for many years, especially if this is your forever home. In addition, your mortgage is like an investment. You want to have the lowest interest rate to minimize the cost of borrowing the money, but you also want to make sure you have the best terms.
So, what should you look at when you are looking for the right mortgage?
How Much Down Payment do You Have?
Your down payment plays a role in the type of mortgage you choose. Each mortgage program has a different minimum down payment requirement as noted below:
- Conventional loans – Minimum down payment of 5%
- FHA loans – Minimum down payment of 3.5%
- VA loans – No down payment required
- USDA loans – No down payment required
You can start narrowing down your loan options based on the amount of money you have to put down on the home. For example, if you don’t have 5% of the purchase price to put down on a home, you can’t apply for a conventional loan.
What is Your Credit Score?
Another large determining factor in the loan program that you choose is your credit score. Just like down payment requirements, each loan program has different credit score requirements too:
- Conventional loans – Minimum credit score of 620, but most lenders require a higher score
- FHA loans – Minimum credit score of 580
- VA loans – Minimum credit score of 620
- USDA loans – Minimum credit score of 640
Keep in mind, that each lender can have their own requirements on top of the program’s requirements. For example, the FHA requires a minimum 580 credit score, but an FHA-approved lender may not accept applicants that have a credit score below 620. You’ll have to shop around to find a lender that doesn’t add their own requirements.
What is Your Debt Ratio?
Each loan program also has its own debt ratio requirements. Your debt ratio is a comparison of your gross monthly income to your debts. The lower your debt ratio is, the higher your likelihood of getting approved becomes. The major loan programs have debt ratio requirements as follows:
- Conventional loans – 28% housing ratio and 36% total debt ratio
- FHA loans – 31% housing ratio and 43% total debt ratio
- VA loans – 43% total debt ratio
- USDA loans 29% housing ratio and 41% total debt ratio
The VA has a unique requirement. They don’t look at your housing ratio. Instead, they focus on your disposable income. The VA has a required amount of money you must have left over at the end of each month in order to qualify for their loan. They base the requirement on your family size and location.
What Type of Interest Rate do You Want?
Next, you’ll need to decide what type of interest rate suits you the best. You can choose from a fixed or adjustable interest rate.
The fixed interest rate remains the same for the life of the loan. You never have to worry about the rate adjusting. You always know what your principal and interest payment will be.
The adjustable interest rate remains fixed for a short period, typically 1 – 10 years, then adjusts annually. After the adjustment period, you will not know what interest rate you will end up with until the day that it adjusts as it’s based on the market at the time of adjustment.
What Term do you Want?
Finally, you have to choose your term. Do you want a 10, 15, 20, 25, or 30-year term? The most common is the 30-year term. This loan offers the lowest payment, but you will likely pay the most interest on it. Since you pay interest until you pay the loan off in full, your total interest paid will likely be more than with a shorter term.
The bottom line is that the mortgage you should choose is the one that suits you the best. Take a close look at the factors that make up your loan application. You’ll then have a better idea regarding which loan will suit you the best. If you do decide that you made the wrong decision or you can’t afford a conventional loan when you really want one, you can refinance down the road when your qualifying factors change and you can obtain the loan.Click to See the Latest Mortgage Rates»