4 of the Most Common Types of Mortgages

With Toby Stanfield and Brittni Cooke of Highlands Residential Mortgage

Before buying a home, you first have to know how you’re going to pay for it. For many, that may seem like a no-brainer, but a lot of us get excited at the prospect of owning a new home, and want to start house shopping before we even know what we can afford.

When it comes to figuring out financing, most people don’t even know where to begin, which is part of the reason so many jump to calling a Realtor to show them homes. There is nothing wrong with calling a Realtor first, but you should know one of the first questions a good agent will ask you is, “Are you pre-approved for a loan?” No need to get discouraged if you haven’t been pre-approved! A good agent will also be able to refer you to a reputable lender if you don’t already have someone to turn to. But, something else you might be wondering is, what kinds of mortgages are there?

You may be thinking that a loan is a loan, but not all loans are created equal, and for good reason. Below, read on to find out how the four most common types of loans in North Carolina (and most of the United States) work.

Conventional

Conventional loans tend to be the most common type of mortgages people receive when financing a new home. A lender will look at all the usual things to find out if you qualify such as your finances and credit history, however to receive a conventional loan, you have to have a very good credit score to get the best interest rate.

So, what makes a good credit score?

According to Brittni Cooke from Highlands Residential Mortgage, the average “good” credit score that will help you land that conventional loan is around no less than a 700. Additionally, lenders will not only look at your score, but also your history of credit usage to determine if you are indeed eligible. Lenders will also look at your debt-to-income ratio to help you get the best minimum down payment possible and make sure you can actually afford to pay an extra monthly bill.

Conventional loans are also considered less risky when it comes to the home-buying process once it is under contract since it has a faster processing time due to their being less restrictions on the property (more on that later).

FHA

FHA stands for “Federal Housing Administration”, which is the government department created to help low-income individuals and families in the United States obtain loans with lower credit scores and down payments. Technically, the FHA does not actually pay out any money for the loan, but backs the funding, however borrowers must pay for their own mortgage insurance.

This type of loan enables lower-to-middle class families to get the best possible rates with typically a minimum credit score of 640 and down payment of as little as 3.5%, compared to 10- 20% on conventional.

The downside to this type of mortgage is the appraisals are notoriously “picky” and things as minor as chipping paint or rotting wood, to as major as mold or an aging roof, can hold up the entire process. However, according to Toby Stanfield of Highlands Residential Mortgage, people are most commonly qualified for an FHA loan, making it still one of the most popular and favorable loans for buyers to get.

VA

As the name of this loan suggests, it is exclusive for those who serve or have served in the US military. Qualified veterans can obtain financing from the Department of Veterans Affairs for no down payment at all! Often, only a small fee will have to be paid, which can even be rolled into the mortgage if the buyer prefers.

For a veteran, this is an obvious mortgage possibility, especially if they have a low or fixed incomes. Borrowers will still have to pay closing costs and earnest money, and the home they pick will have to meet the VA’s standards like in an FHA situation, but it is definitely worth applying for if you have served for at least 90 days consecutively.

USDA

USDA stands for the “United States Department of Agriculture”, and is designed for low-income families living in rural areas. Backed by the Federal Government, properties must meet the USDA’s minimum requirements to be considered a rural area, and can be obtained with little or no down payment.

These types of loans are similar to FHA and VA in the way that they work, but your debt must not exceed your income by more than 41%. Also, like in an FHA loan, borrowers must purchase their own mortgage insurance. To see if the area you’re interested in purchasing in meets a USDA loan’s guidelines, it must have a population of no more than 25,000, according to Toby Stanfield. Click Here to find out if a property or area qualifies.

These are the 4 main types of loans available for first-time homebuyers, however you do not have to be a first-time homebuyer to qualify for any of these programs. Call or email Brittni Cooke (336) 272-3061 or at bcooke@highlansmortgage.com today to get more information, and learn more about these financing programs as well as other options.