Which mortgage loan is right for you?

Young family standing in front of their new home.If you're a first time home buyer, purchasing a home might seem overwhelming.

You might be thinking, how do I buy a home", "what are the requirements for buying a house", "who has the lowest interest rate", how much can I afford", and last but not the least, your want the "best deal".

Most home buyers purchase a house with  a mortgage. But what is mortgage? The word mortgage is a French word for "death contract" (sounds appropriate). The mortgage (loan) ends (dies) when either the loan is paid off or the property is taken through foreclosure.

The first requirement to buy a home in most states is the age of the home buyer, usually 18. However, a co-borrower can sometimes enable a minor to purchase a house.

If the home buyer is financing the purchase with mortgage, the home buyer will require a credit score of at least 620, although, the FHA loan program permits a credit score as low as 580.

Most lenders will require the applicant to be continually employed for at least 24 months prior to application, but the employment guidelines may also include education allowances. The FHA loan program is the most generous with regard to employment requirements.

Buying a house usually requires a down payment and closing costs. The Veteran loan does not require down payment and the home seller is permitted to pay the veteran’s allowable closing costs. The FHA requires a small down payment and closing costs, however, the seller is permitted to pay a percentage of the buyer’s closing costs and the FHA program permits eligible donors to “gift” the down payment and closing costs if the seller or buyer are unable to unwilling to pay the settlement and mortgage costs. The USDA has generous mortgage requirements.

Another requirement of buying a house is the debt to income calculation. Lenders use a formula to compare the ratio of monthly debt to monthly income. The debt to income ratio varies from mortgage program to mortgage program.

There are four primary type of loans to finance a home:

  • FHA (Federal Housing Administration)
  • VA (Veteran's Administration)
  • USDA (United States Department of Agriculture)
  • Conventional (Fannie Mae and Freddie Mac)

MazeEach home loan program has it's own guidelines and relative merits. For example, an FHA loan only requires only a 3.5% down payment and you do NOT need to be a first time home buyer, however, there are loan limits. The USDA home loan program(currently) does not require a down payment, however, the home must be located in a designated rural area. The Veteran's mortgage (VA) does not require a down payment and the seller can pay all closing costs . . . but of course, you must me an eligible veteran to take advantage of the VA mortgage.

Banks and mortgage brokers may not offer every loan program!

Banks and mortgage brokers must be licensed or "approved" to offer FHA, VA and USDA financing. So if you seek out a lender for mortgage preapproval, and the mortgage company is not approved for say an FHA home loan, it's unlikely the lender will say, "you need to speak to the lender down the street, because he offers FHA financing, we don't".

Man holding a business cardOr let's say you're a vet and you want to use your eligibility and the mortgage company doesn't participate in the VA loan program, again, the lender will probably steer you into a program that his company offers.

So, the first step in the home buying process is to seek out a bank, mortgage broker or lender who can pre-approve you under different mortgage programs.

Mortgage Questions and Answers

► Are closing costs added to loan?

No. Closing costs are paid separately at closing/settlement.

► Are closing costs based on loan amount or purchase price?

Both. Some closing costs have a fixed cost, like a credit report or a lender-processing fee, but some fees are based on the sales price. A good example is a transfer tax or a recordation fee, those two fees are usually based on the sales price. Title insurance is often calculated on the purchase price, however, in some areas, the cost is based on the loan amount.

► Are FHA foreclosures a good deal?

FHA foreclosures can be a bargain. These homes were originally financed with an FHA loan and when the homeowner defaulted on the loan, the Federal Housing Administration eventually took ownership of the house. FHA foreclosures are also known as "HUD homes". Learn more

► Can I get a mortgage with bad credit?

Bad credit can certainly prevent a home buyer from obtaining a mortgage; but what is "bad credit"? Seek out a mortgage professional to review your credit report. The mortgage lender can determine whether your credit score and history will prevent you from buying a home. The FHA home loan program allows for credit scores as low as 580. 

► Do I need title insurance when buying a home?

Yes. Mortgage companies and banks require title insurance as a condition of the loan. If you are paying cash for the property, it is a good investment. Title insurance is costly in some states, but, it is a one time charge. Title insurance protects against fraud, unpaid taxes by the previous owners, property line errors, etc.

► Do you need a home inspection when buying a house?

No, but, it is a wise decision to obtain a home inspection if you can afford one. Homebuyers usually fall in love when they find the right house. Often, homebuyers tend to over look tell tail signs of problems (i.e. water marks, mildew, wall bow, etc.). Occasionally, a seller will deliberately conceal defects and problems. It does make sense to bring an unbiased professional in to render his or her opinion of the house before settlement or loan application.

► Do you have to have mortgage insurance?

Maybe. The FHA, VA and USDA programs mortgages require a sum of money to be paid at closing or financed with the loan. The FHA and VA also require monthly mortgage insurance payment. The VA home loan does not have monthly mortgage insurance. Conventional loans require mortgage insurance if the down payment is less than 20%. The mortgage insurance is usually paid monthly and there is no requirement for an upfront payment. Mortgage insurance is not life or disability insurance. Mortgage insurance is a cost to support the FHA, VA or USDA loan programs or in the case of a conventional loan, to protect the lender against default by the buyer.

► How do I figure out my mortgage payment?

View the current interest rates and calculate the mortgage payment with the Interest Rate Comparison Chart.

► How much is a jumbo loan?

Jumbo loans exceed the statutory lending limit for the US County where the home is located. Learn more

► What affects your credit score?

Any number of factors will determine your credit score. For example, the number of open credit accounts and the available balance will affect the credit score. Judgments and collection accounts can really deteriorate a credit score. Read more

► What are FHA loans?

FHA loans are federally insured home mortgages. The FHA mortgage is a low cost way to purchase a home. Read more

What is the best mortgage loan?

The "best" mortgage loan will depend on your individual circumstances. Here's a home loan comparison.

Home Buying Programs Loan requirements Downside
FHA Home Loan
(Federal Housing Administration)

FHA logo

The FHA loan is a government home loan program that offers a low down payment of 3.5%, no first time home buyer requirement, and the seller is permitted (not required) to pay up to 6% of the sales price toward closing, escrow and prepaid costs.

There are maximum mortgage amounts with an FHA mortgage.

There is monthly mortgage insurance (MIP), even if you make a down payment of 20%. FHA funding fee.
Read more

Veteran Loan (VA)

VA logo

VA home loans do not require a down payment requirement - "0".

The seller is permitted (not required) to pay all closing costs. No monthly mortgage insurance premium (MIP/PMI)

All vets must pay a funding fee (except disabled vets).
Read more

(United States Department of Agriculture)

USDA logo

The USDA home loan is another government home loan program. The USDA mortgage is a zero down mortgage. Monthly mortgage insurance premium (PMI) is required as of 10/1/2011.

The seller is permitted (not required) to pay up to 6% (and possibly more) of the sales price toward the buyer's closing costs.

The home must be located in a USDA defined "rural" area. Read more

Fannie Mae & Freddie Mac
(Conventional Loans)

Fannie Mae logo

Freffie Mac logo

No mortgage insurance (PMI) with a down payment of 20% or more. No funding fee.

Fannie Mae and Freddie Mac provide financing for home buyers whose income is deemed to be low to moderate.

Private mortgage insurance is required for down payments less than 20%. Loans exceeding the Fannie/Freddie limits are known as Jumbo loans. Read more