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%.