Whether you’re a first-time homebuyer or have purchased a property before, one of the biggest steps in the homebuying process is choosing the right mortgage. A mortgage is a specific kind of loan that is used to buy a home or real estate property, and there are different types that you may qualify for. To help educate Capital Region homebuyers about mortgage loans, we spoke with Michael Rankin, President of ClearPath Mortgage Solutions in Latham, who provided insider tips about the loan process.
How Do You Know Which Mortgage Is Right For You?
As described by the Consumer Financial Protection Bureau, “A mortgage is an agreement between you and a lender that allows you to borrow money to purchase or refinance a home and gives the lender the right to take your property if you fail to repay the money you’ve borrowed.” Your lender might be a bank or a professional mortgage broker, such as ClearPath Mortgage Solutions.
The 4 main types of mortgages available to homebuyers are conventional loans, USDA loans, FHA loans, and VA loans. When you meet with a lender, you’ll provide a variety of financial information, such as a completed 1003 loan application, pay stubs, tax returns, and credit reports in order to become pre-approved for a mortgage.
But how do you know which mortgage is the best fit for you? According to Rankin, it’s a bit circumstantial. The right mortgage is not only the one that you qualify for, but it should also meet your needs and wants. You have to consider your budget and financial situation, including how much you can spend on the down payment and taxes, as well as your timeline. Do you want to act now, or can you wait to improve your credit score and get a better interest rate on your loan? These are the types of questions to ask yourself and discuss with your lender.
“Getting a perfect mortgage for the home you love is one with no regrets,” Rankin explained, “and that’s the one that’s right for you.”
Make Sure You Understand the Differences Between These 4 Mortgage Loans
As mentioned above, conventional loans, VA loans, USDA loans, and FHA loans are the most common types of mortgages, and it’s important to understand the differences between them. During our interview with Rankin, he broke down some key facts about each one that every homebuyer should know.
Conventional loans are the most popular type of mortgage, and they account for approximately 80% of all mortgages closed. This is a private type of loan (not government-backed) that requires a higher credit score to qualify for compared to a FHA loan. The minimum down payment is 3% down, but if you can make a larger down payment, then you might be able to avoid paying private mortgage insurance (PMI). Conventional loans and FHA loans are both popular among first-time homebuyers.
Guaranteed by the Department of Veterans Affairs for eligible veterans, service members, and surviving spouses, VA loans are the best financial loan, have no down payment, are flexible, and they can be used multiple times to buy or refinance a home. In Rankin’s experience, VA loans often have better rates than other loans and can save you more money monthly and out-of-pocket. This is the first type of mortgage that veterans should look into.
The USDA loan is a type of mortgage loan offered by the United States Department of Agriculture, and it’s the only other mortgage aside from the VA loan that allows you to have no down payment. However, you have to buy a home in an eligible rural area, which you can find out about on the usda.gov website. There are also some other eligibility requirements, such as income thresholds and strict debt-to-income ratios. If you are eligible for it, then the USDA loan can save you money both monthly and out-of-pocket.
The FHA loan is a flexible, government-backed loan provided by the Federal Housing Administration, and it can help homebuyers with debt or a lower credit score. One of the benefits of the FHA loan is that it allows you to put down a 3.5% down payment, which is a low down payment. In addition, you can finance almost all of your closing costs and taxes into the loan. However, you can expect higher monthly payments and stricter property requirements during the FHA inspection.
Take the First Step to Getting That Perfect Mortgage
Now that you understand the different types of mortgages, are you ready to enter the real estate market, get the perfect mortgage, and buy a new home? Rankin recommends the following steps:
- First, choose a mortgage broker who you can trust to look out for your best interests. A local, independent broker will take the time to teach you about how mortgages work and determine the best options for you and your family. If you shop around and look up reviews, you’ll find the help you need.
- Next, become pre-approved for a mortgage. This step involves providing your loan officer with financial information, such as proof of income, credit history, bank statements, etc. After the information is reviewed, you will receive an official statement of how much your lender will let you borrow.
- After you’re pre-approved, you can search for homes within your price range and find the right fit.
This is where our team at Sterling Homes Real Estate comes in. Our experienced agents specialize in all kinds of real estate transactions in New York’s Capital Region, and we can team up with you and your lender to help you get the perfect home.