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What Type Of Mortgage Should I Get? Weighing the Pros and Cons

Louis Wilson Sep 3, 2020
What Type Of Mortgage Should I Get?

For an aspiring homeowner, finding your ideal house is only half the battle. Other than prospects who have the financial ability to pay cash, most homebuyers face the challenge of finding the right home loan to finance such an investment.

Mortgages come in a wide range of forms and sizes to meet your financial needs. So, which type of home loan is best for you? To help you pin down a home loan with greater confidence, here’s a detailed explanation of the three types of mortgages you can choose from.

Conforming loans

These loans follow the guidelines of Fannie Mae and Freddie Mac, the two main players in the mortgage market. Conforming loans are a form of conventional loan and are backed by Fannie Mae and Freddie Mac. These loans are subjected to the following limits:

The pros of a conforming loan

  • Unlike non-conforming loans, you can buy a house with as low as a 3% down payment
  • Interest rates are lower

The cons of a conforming loan

  • You cannot get more than the maximum loan amount
  • You must meet all the requirements, including the credit score and the debt-to-income ratio

Non-Conforming loans

These are a form of conventional loan that do not follow the standards of Fannie Mae or Freddie Mac. This means they’re neither backed by Fannie Mae/Freddie Mac nor by the government. A good example is a jumbo loan.

The pros of a non-conforming loan

  • You can get a larger loan exceeding the limits of Fannie Mae and Freddie Mac
  • You can afford a more expensive house
  • Fewer restrictions compared to conforming loans

The cons of a non-conforming loan

  • You need to have a very high credit score to get this kind of loan
  • Higher down payment may be required
  • Likely to attract higher interest rates and higher closing costs

Government-backed loans

These are loans backed by the US government. They’re meant to assist people with low credit scores in getting loans. These loans are divided into three categories:

  1. FHA Loans: These are loans insured by the Federal Housing Administration (FHA). To qualify for this loan, you must be buying a primary residence house. You also need a credit score of 580 and a 3.5% down payment or a credit score of 500 to 579 and a 10% down payment.
  2. VA Loans: These are loans backed by the US Department of Veterans Affairs (VA). To qualify, one must be an active duty member or a veteran of the US armed forces. You also need a certificate of eligibility from the VA.
  3. USDA Loans: These are loans backed by the US Department of Agriculture (USDA). To be eligible, your income must meet specific guidelines, and the house you want to buy must be within the eligible rural area.

The pros of a government-backed loan

  • Requires a lower credit score compared to other loans
  • VA loans may not require a down payment
  • Lower interest rates

The cons of a government-backed loan

  • You must meet special qualifications, such as being a military member, buying a house in eligible areas, and having an income level within specific limits
  • Loans are subject to maximum limits and personal insurance if the down payment is less than 20%
  • You can’t get a VA or FHA loan unless you’re buying a primary residence

Questions to Ask Yourself When Getting a Mortgage

  1. Am I eligible? Check whether you’ve met specific requirements for each loan, especially for government-backed loans.
  2. What’s my credit score? The highest score is required for non-conforming loans, a moderate score for conforming loans, and a lower score for government-backed loans. Your lender can assist you in determining your credit score.
  3. How much can I afford? Consider how much down payment you can afford as well as the monthly mortgage payments. This is determined by many factors, but here’s some guidance on that.
  4. Is this my primary residence? If it is, you’ll likely have more options and better terms, such as lower interest rates.
  5. Should I choose a fixed or variable rate? If you plan to resell the house soon, you might prefer a variable interest rate. Read more about interest rates here.

Which Type of Mortgage Suits You Best?

A mortgage is a long-term obligation. So, it’s crucial to carefully weigh your options and choose what works best for you. A savvy step calls for consultation with a mortgage expert to discuss your finances and relate the same to your homeownership goals.

This articles was updated on September 8th, 2021.