a happy family of three smiling, embracing by the FOR SALE sign in front of the new home they just purchased

The journey to homeownership can be overwhelming at times—from finding a great realtor to shopping for the right type of mortgage loan. After all, choosing a mortgage loan, which best fits your needs, is just as important as choosing your new home.

To narrow your search, first ask yourself some questions about what your future home looks like. This will naturally lead you to the best mortgage loan options to fit your criteria.

What Are Your Long-Term Homeownership Goals?

It is always wise to ask yourself about your goals for the next five to 10 years. Consider whether the property will meet your needs, personally and financially, to determine if it’s the right choice for you. Think about the following:

  • Will the home fit your needs for the foreseeable future?
  • Do you see it as a starter home?
  • Possible future rental property?
  • How long are you planning to stay in the new property?
  • Will your finances change in the next few years?
  • Do you have any financial goals to consider before buying a new home?
  • Are there other big life changes you are planning (i.e., getting married, having children, starting a business, retiring, etc.)?

These questions will assist you in not only finding the right type of home but the type of mortgage loan that is best suited for you.

Choosing Among Various Types of Mortgage Loans

Examining types of mortgage loan options comes down to a deep dive into your finances. Consider the following as you look at your financial picture:

  • Which loans would you qualify for?
  • Do you have enough money for a down payment?
  • Should you aim for a loan with no down payment, or little down?
  • How is your credit score?
  • Do you want to pay as little as you can, then gradually increase your monthly payments?
  • How soon do you want to be debt-free?

By understanding your goals, you are well-positioned to choose among the various types of mortgage loans in which you qualify.

Government-Backed Loans (FHA, VA, USDA)

A government-backed mortgage is insured by the federal government. These types of mortgage loans protect lenders against defaults on payments, making it easier for you to qualify (if you meet the requirements,) and, in turn, allow the lender to offer lower interest rates.

FHA Loan Requirements

  • Credit score at least 580, and a minimum of 3.5% down payment.
  • Credit score between 500-579, with a 10% down payment.
  • MIP (Mortgage Insurance Premium) is required.
  • Debt-to-income ratio must be less than 43%.
  • The home must be your primary residence.
  • You must have a steady income and proof of employment.

VA Loan Requirements

  • You are on active duty and have served 90 continuous days.
  • You are a veteran who meets length-of-service requirements, which generally are 90 days in wartime and 181 days in peacetime.
  • You completed 90 days of active-duty service or six creditable years in the Selected Reserve or National Guard.
  • You are the surviving spouse of a veteran who died while in service, or from a service-connected disability and you have not remarried, or you remarried after age 57 or Dec. 16, 2003. Spouses of service members missing in action or prisoners of war are also eligible.

USDA Loan Requirements

  • Must be a U.S. resident, non-citizen national, or Qualified Alien.
  • Must be in an eligible rural or suburban area.
  • Families must demonstrate economic need, adjusted gross income can’t be more than 115% of the median income in your area.
  • Prefer DTI to be 50% or lower.
  • Most lenders require a credit score of 640 or better. If your score is close to that or below, you may still qualify.

Other Considerations For Choosing the Best Mortgage Loan

Now that you understand your financial landscape as it pertains to taking out a mortgage and have determined if you qualify for a government-backed mortgage loan, you can begin to explore other qualities of loan types.

Fixed-Rate vs. Variable-Rate

Variable rate mortgages often provide lower initial rates that can often be fixed for 5, 7 or even 10 years. An important component of determining whether an ARM or Fixed-rate mortgage is best for you is how long you may live or remain in the home as well as how much lower your payments will be for the fixed period of the ARM.

On an adjustable-rate mortgage (ARM), your initial interest rate is set below the market rate compared to fixed-rate loans, after some time the rate typically rises (occasionally decreases).

An ARM loan does require the borrower to weigh the lower cost upfront, period of time that lower rate will be fixed, potential future adjustments as well as how long they will be in the home. An ARM loan isn’t for everyone but for the right borrower and circumstances, it can be the right financing option.

Conforming Loan vs. Jumbo Loan

Conforming loans must not exceed annually specified maximums. These can vary geographically. These types of loans are most common and may offer more favorable loan approval requirements.

Jumbo loans exceed the maximum Conforming loan limits and as a result often require a bit higher credit score. The interest rates can be slightly higher on Jumbo loans as well.

Private Mortgage Insurance

Private Mortgage Insurance (PMI) is an added insurance policy for homebuyers who can’t afford a 20% down payment. A monthly PMI fee protects the lender in the event you can’t pay your mortgage.

Even though it is an added cost that many would like to avoid, PMI allows you to buy a home, and begin building equity without waiting several years to save for a 20% down payment.

15-Year vs. 30-Year Mortgage

Are you more concerned about the interest rates, and what you will be paying? Or, is being mortgage-free as quickly as possible more attractive to you?

The benefits of a 15-year mortgage are that you build equity faster, your home will be paid off sooner, and a lower interest rate will save you money in the long term. The negatives are that you will have larger monthly payments, you may have to settle on a less expensive home, and possibly have less money on hand for emergencies.

The more popular choice is the 30-year mortgage. This is because it offers lower monthly payments (with the option to pay more if you want), allows you to buy a more expensive home, and is easier to qualify for. The downside to 30-year mortgages are slightly higher interest rates and it takes longer to build home equity.

Adjustable-Rate Mortgage Loans

With an adjustable-rate mortgage (ARM) loan, borrowers enjoy an initial interest rate below what the market rate would be on a similar fixed-rate mortgage. While the rate rises as time goes on, for the first several years of a mortgage, you’ll have low monthly payments well below what you would otherwise pay.

Hybrid ARMs—also called 5/1 or 5/5 loans—are increasingly popular. They can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period than most adjustable-rate loans.

For example, a "5/1 loan" has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable-rate loan, based on then-current rates for the remaining 25 years.

It's a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs.

Learning More About Types of Mortgage Loans

There are many factors to consider when choosing the right loan for your needs, your finances, and your future.

At Chartway, we’re dedicated to helping our members explore their mortgage options whether it’s your first home or you’ve purchased a home before. Click below to learn more about our mortgage loans and begin discovering which is the best fit for you.

Mortgage Loans