There are numerous mortgage options available on the market today. Which one is right for you? We’ll review the most common mortgage options in greater detail below. 

Before diving into the details, let’s take a step back and look at a mortgage on a high level. A mortgage is an agreement between two parties, the borrower and the lender. 

The Borrower - The borrower is the individual who is seeking money to purchase a property. Borrowers come in various forms. For example, one person may be requesting a mortgage, a husband/wife may be requesting a mortgage, or a group of investors coming together may request a mortgage on a property. 

The Lender - The lender is a bank, credit union, or financial institution, who will lend the borrower(s) money. In exchange, the lender charges a lending fee, known as the interest rate. The lender will also require the money to be paid back over a specific number of years, which is known as the duration of the mortgage. 

Each lender may offer a slightly different package. The large multinational bank in your hometown may offer you an interest rate of 3% on a 30-year fixed-rate mortgage, whereas the credit union may offer 2.8% on a 30-year fixed-rate mortgage. One of the smartest things you can do as a borrower is shop around to see who is offering the most competitive all-in option. 

Not only does the borrower have the choice to shop around across various lenders, but each lender may also have different options they can offer you. These options are known as the various mortgage types.

The following are the most common mortgage types on the market today. 

FHA Loans - FHA loans are loans backed by the Federal Housing Administration or Federal Government. The government insures these loans and guarantees the lender will not be at a loss of money if you, the borrower, default on the loan. FHA loans are a common option for the following reasons:

• FHA loans do not require a large down payment. In fact, you can get an FHA loan with as little as 3.5% down 
• FHA loans are more lenient with their credit score requirements. You can secure an FHA loan with a credit score as low as 580. 

Considering the fact that the Federal Government backs FHA loans, lenders are more inclined and comfortable lending money to people financing via an FHA loan. 

Conventional Loans - Private lenders issue conventional loans, and they are certainly not backed by the Federal Government. For that reason, it could be more challenging to qualify for a conventional loan. Your credit score has to be at least 620, and your debt-to-income ratio cannot exceed 45%. You are able to secure a conventional loan with as little as 3% down, but that will require private mortgage insurance. Conventional loans provide competitive interest rates. 

VA Loans - The Department of Veteran Affairs also issues loans, and these loans are backed in full by the Federal Government. VA loans are for active-duty US service members, inactive duty service members who received an honorable discharge, and eligible spouses. VA loans have numerous benefits! The two main benefits of a VA loan are: You do not need to put a single dollar down as a down payment. That is correct, VA loans can be obtained with no money down! Additionally, private mortgage insurance is not required, even if you don’t put down 20%. 

Jumbo Loans - A jumbo loan is used when the property’s value is above and beyond what an FHA or conventional loan will approve. For example, if someone wanted to purchase a $1,500,000 home, with 20% down, they’d be required to finance via a jumbo loan. Jumbo loans have strict criteria. At the top of that criteria list is one’s credit score, which must be high! Additionally, they’ll need to have a high income so their debt-to-income ratio isn’t at the point of insolvency. 

A Bridge Loan - A bridge loan is when one secures a loan for a very short period of time. This type of mortgage is common as one works on securing a more long-term financing option. For example, if one is purchasing another home before actually selling their existing home, they may use a bridge loan as they wait to sell their existing home. Once their existing home has sold, they’ll use that money to refinance their new home with a more conventional financing route. Bridge loans are a useful tool, but you’ll pay a premium for it by way of a higher interest rate. 

Home Equity Line of Credit - A home equity line of credit, also known as HELOC, is a loan against the equity you’ve established in your home. Equity is simply the difference between what you owe on your home, and what your home is worth. For example, if you owe $200,000 on your mortgage, and your home is worth $350,000, you have $150,000 in equity. You can typically get a HELOC for 75-80% of the equity in your home. This line of credit must be repaid, but can be used for a variety of life expenses - including renovating or updating your home. 

There is no shortage of decisions that must be made whenever you are buying your home. Deciding which mortgage is right for you, or which mortgage you qualify for, is amongst the most important decisions you can make. After all, your mortgage is typically for a 15-30 year period. If you have any questions about which financing option is right for you, please reach out. I’ll be happy to answer your questions, and explain in greater detail the advantages and disadvantages of each financing option. 

Michael Mccarthy

Mikemccarthy@leaderbank.com

NMLS #449250