Type of Mortgages and How to Compare Mortgage Loan
How to Find the Best Mortgage Lender
It is easier than ever to find a
mortgage lender. Mortgage rates are readily available online on lender and rate
aggregation sites, and many lenders aggressively post ads with their rates as a
way to draw you to their website.
The banks or credit unions where
you have accounts are good places to start on your mortgage loan search, as
they might offer special rates and fees for customers. It’s also easy to search
online and find lenders as well as websites that aggregate
information—including ratings—about top mortgage brokers and lenders.
Finally, talk to friends and real
estate professionals for references—they might be able to suggest a lender or
broker that they’ve worked with and can recommend.
How to Prepare
Before you start applying and
seek mortgage pre-approval, make sure you’re financially ready to take on a
loan and get the best rate possible. You’ll want to prepare for your mortgage
application by:
1. Checking and improving your credit score. Check
your credit score at least several months before you apply for a mortgage and
work on improving it. Paying off credit card balances, making sure you make
payments on time and not taking out loans or opening multiple credit cards will
help you build a higher score or maintain a strong one.
2. Saving for your down payment. Although a down
payment of 20% or more is ideal, you can get loans for as little as 3% down as
long as you can effectively cover the monthly payments.
3. Ensuring your income is stable. Lenders want to
make sure you have enough income to afford the monthly payments now and in the
future.
Key Questions to Ask a
Mortgage Lender
Before you select a lender and
complete your mortgage application, here are some questions to ask:
·
How long do you expect the process to take?
·
Will you be my main contact throughout the
process, or will someone else take over when it goes to underwriting? How will
we keep in touch?
·
Which steps will take place online and which
will occur in person (such as appraisal and closing)?
·
How long of an interest rate lock do you
recommend? If the closing doesn’t take place before that date through no fault
of my own, will I have to pay for an extension?
If you’re working with a mortgage
broker, you should ask these two
questions:
·
How many lender quotes did you review and why
did you select this lender and rate as the best?
·
What fees and commissions will you charge and who
will pay for them—me, the lender or both of us?
How to Compare Mortgage Loan
Offers
Before you settle on a winner,
it’s important to compare interest rates and fees offered by at least three
lenders and/or brokers so you can be sure you have the best deal. Here are a
few ways to compare the offers:
Interest rate. This is the most
obvious way to choose between lenders, but it shouldn’t be your only
determining factor. Keep in mind that rates change daily, so you’ll want to be
sure you have the right lender before you lock in a rate and finalize the
application. Also ask about points, which are fees that may allow you to get a
lower interest rate. Find out how much they cost and whether you need them at
all.
Fees. There are a variety of fees
associated with a mortgage loan. Not all of them are clearly understandable.
Some lenders might list the fees individually while others lump them together.
Ask about all of them—including application fees, underwriting costs and others
that are charged at closing. Compare between lenders and negotiate as many of
the fees as possible.
Down payment and mortgage
insurance. You’ll want to put down as much money as possible on a mortgage
loan, but also make sure you’re saving for the inevitable home expenses—such as
repairs and furnishings—for when you move in. For that reason, work with the
lender to see if there are any down payment assistance programs that can help
you get the loan without stripping your savings, especially if you are a
first-time homebuyer. If you put down less than 20%, you’ll likely need to pay
private mortgage insurance (PMI).
Once you decide which offer is best for you, complete the application. As long as you have your paperwork in order and there aren’t any financial issues that arise before closing day, you’ve likely been through the toughest part of the mortgage process. You can look forward to signing your loan documents at closing and moving into your new home.
Are There Different Types Of
Mortgages?
There are many types of home
loans. Each comes with different requirements, interest rates and benefits.
Here are some of the most common types you might hear about when you’re
applying for a mortgage.
There are two main categories of mortgages: conforming loans and non-conforming loans. Non-conforming loans include government-backed mortgages, jumbo and non-prime mortgages.
Conventional Conforming Loans
The phrase “conventional loan”
refers to any loan that’s not backed or guaranteed by the federal government.
Conventional loans are often also conforming loans. The term “conventional”
means that a private lender is willing to make the loan without government
support, and “conforming” means that the mortgage meets a set of requirements
defined by Fannie Mae and Freddie Mac – those are two government-sponsored
enterprises that buy loans to keep mortgage lenders liquid, so they can
continue making loans.
Conventional loans are a popular choice for buyers. You can get a conventional loan with a down payment of as little as 3% of the purchase price of the home. If you put down less than 20% for a conventional loan, you’ll usually be required to pay a monthly fee called private mortgage insurance, which protects your lender in case you default on your loan. This adds to your monthly costs but allows you to get into a new home sooner.
Non-Conforming Loans: Government-Insured Mortgages
In addition to conventional
loans, most private lenders also offer government-backed mortgages. These
mortgages are geared toward helping first-time, low- to median-wage earners and
those with past credit difficulties buy a home. These are loans that lenders
might deny without government insurance.
1. FHA
Loans
FHA loans are a popular choice because they have low down payment and credit score requirements. You can get an FHA loan at most lenders with a down payment as low as 3.5% and a credit score of just 580. These loans are backed by the Federal Housing Administration; this means the FHA will reimburse lenders if you default on your loan. This reduces the risk lenders are taking on by lending you the money; this means lenders can offer these loans to borrowers with lower credit scores and smaller down payments.
2. VA
Loans
VA loans are for active-duty military members, qualified reservists, eligible members of the National Guard, qualifying surviving spouses and veterans. Backed by the Department of Veterans Affairs, VA loans are for those members of the U.S. armed forces, as a benefit of service. VA loans are a great option because they let you buy a home with 0% down and an upfront fee that can be built into the loan instead of private mortgage insurance.
3. USDA
Loans
USDA loans are
only for homes in eligible rural areas (although many homes on the outskirts of
the suburbs qualify as “rural” according to the USDA’s definition). To get a
USDA loan, your household income can’t exceed 115% of the area median income.
USDA loans are a good option for qualified borrowers because they allow you to
buy a home with 0% down. For some, the guarantee fees required by the USDA
program cost less than the FHA mortgage insurance premium.
Rocket Mortgage doesn’t offer USDA loans at this time.
Conventional Non-Conforming
Loans: Jumbo Mortgages
Conforming mortgages are subject
to lending limits. In 2022, the conforming loan limit in most of the U.S. is
$647,200, while in areas of the country with high-cost housing, the limit is as
high as $970,800. If you want to buy a house that costs more than that and you
need financing, you’ll have to apply for a jumbo loan.
Because jumbo mortgages exceed
the conforming loan limits and are offered by private lenders without
government incentives, they’re considered conventional non-conforming loans.
Traditionally, a jumbo loan required at least a 20% down payment, and tons of
paperwork to get approved.
Rocket Mortgage offers the Jumbo
Smart loan. With a Jumbo Smart loan, you can borrow up to $2.5 million. To
qualify, you’ll need a down payment of 10.01% for a loan amounts up to $2
million. (or 15% if you’re buying a home with two units.) Beyond $2 million,
you’ll need a down payment of 25%. You’ll need a qualifying credit score of at
least 680 and a debt-to-income ratio no higher than 45%.
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