You’ve shopped around to find the perfect house, but have you thought about finding the right home loan for your needs? Lenders offer various mortgage programs for buying and refinancing a home, depending on whether you’re most concerned about loan term, loan amount, interest rate, or getting money for a renovation.
Read on to explore your options for mortgage loans.
How to find the right home loan for you
While the interest rate on a home loan is an important consideration, it’s not the only deciding factor when selecting a mortgage.
Here are some other key factors to consider when trying to find the right home loan:
Lenders offer mortgages in a variety of loan terms, including 15-year and 30-year fixed terms. Thirty-year mortgages are popular because the monthly payments are lower than with a 15-year loan. However, you pay a lot more interest over 30 years than you do with a 15-year loan.
Lenders also charge lower interest rates on a 15-year mortgage compared to 30-year mortgage rates because you’re repaying the loan in a shorter time frame.
With a fixed-rate loan, the interest rate doesn’t change as long as you have the mortgage, so your principal and interest mortgage payments are predictable.
The rate on an adjustable-rate mortgage, however, can change over time. Usually, lenders offer a low introductory rate and, after a set period (usually three, five, or 10 years), the rate adjusts to the market rate, which could be higher (or lower) than today’s rates. After that initial loan reset, the rate may change annually.
If you want a mortgage for more than the amount allowed for conforming loans, you need a jumbo mortgage.
Buyers with good credit scores and a sizeable down payment may qualify for a jumbo mortgage and may be able to select from fixed-rate, adjustable-rate, and interest-only loans.
Do you want a mortgage to buy a new house or do you want to refinance to take cash out of your house? How you plan to use the financing will dictate your loan options.
Are you buying a primary home where your family will live, or are you buying an investment or vacation property? The qualification guidelines tend to be more stringent for the latter options.
Do you need a first-time homebuyer program or an investment property loan? A lender who offers a bad credit home loan? As you shop around, pay close attention to the borrowing guidelines for each loan program a lender recommends. Some lenders offer more flexibility in their underwriting guidelines than others. If you have a tricky income situation or you don’t fit into the conventional lending box, choosing a lender that can work with your unique needs, rather than one that offers lower rates but no guideline flexibility, may be a better move.
Are you buying or refinancing?
What you want from a mortgage may differ depending on whether you’re buying a home or refinancing.
With a purchase mortgage, you’re focused on finding the right loan for your situation based on factors such as your credit score, down payment, debt-to-income (DTI) ratio, and desired closing date.
With a refinance home loan, you may be focused on current interest rates and how much money you can save by refinancing. Or you may want to reduce your loan term by switching to a 15-year loan from a 30-year loan.
Other reasons to refinance a mortgage include switching to a fixed-rate mortgage from an adjustable-rate loan, or getting cash out for home improvements or other financial goals.
Both purchase and refinance loans require fees and closing costs, so it’s wise to shop around with at least three to five different mortgage lenders to compare rates, home loan programs, customer service, and fees.
What type of home loans can you get?
Borrowers have numerous options to choose from when they shop for a home loan. In addition, some lenders offer their own proprietary loan programs for borrowers with specific needs.
Here are the most common home loans available to borrowers:
Conventional loans are any loans not backed by the government. They’re usually available in fixed-rate terms of 10, 15, 20 and 30 years. Some conventional loan programs have down payment requirements as low as 3%, but borrowers typically need a credit score of 620 or higher.
Fixed-rate loans come with a fixed interest rate for the life of the loan. They are available on most types of loan programs. Fixed-rate mortgages are popular with first-time homebuyers who want predictable, stable monthly principal and interest payments for the life of their loan.
Adjustable-rate loans offer a low introductory interest rate, so you may save money over a fixed-rate loan at first. Adjustable-rate mortgages are a good choice for homebuyers who plan to sell their homes within a few years, before the loan resets. However, once an ARM resets, borrowers may find that their monthly mortgage payments could become unaffordable.
FHA loans are insured by the Federal Housing Administration (FHA) and are ideal for borrowers who have lower credit scores or little cash saved up for a down payment. A key drawback of FHA loans is you’ll have to pay for upfront and annual mortgage insurance premiums —usually for the life of the loan — which increases your monthly payment. An FHA 203(K) rehabilitation loan has similar requirements but allows you to borrow a higher amount to cover the home’s purchase price and the cost of renovations.
VA loans are guaranteed by the U.S. Department of Veterans Affairs and are available to qualified military servicemembers, veterans, and eligible spouses. VA loans require zero down payment and no mortgage insurance. Buyers can select from fixed- or adjustable-rate loans, and lender fees are capped. However, VA borrowers may need to pay a VA funding fee to help offset the cost of the VA loan program to taxpayers.
USDA loans are backed by the U.S. Department of Agriculture to encourage homeownership in rural areas. The loan are offered in qualifying rural communities and may not require any money down.
Jumbo loans are for buyers who want to borrow more than the conforming loan limit in their area. They require good credit, ample cash reserves, and at least a 10% down payment.
A home equity loan is a second mortgage that lets you tap home equity in a lump-sum disbursement at closing. Home equity loans come with fixed interest rates. This loan is for homeowners who need a substantial amount of cash for a home renovation or other financial purpose more immediately.
Home equity loans and home equity lines of credit (HELOCs) are types of “second mortgages,” because they take secondary priority after your first mortgage. Both types of loans use your home as collateral to secure the mortgage, so failing to repay these loans means you risk losing your home to foreclosure.
A home equity line of credit (HELOC) is a revolving line of credit borrowers can use when they need it, up to a certain limit. It’s similar to how a credit card works. With a HELOC, the initial draw period lasts up to 10 years, and you can use the credit line as often (or as little) as you need, up to your loan limit. Once the draw period ends, you enter repayment, which is usually about 20 years. HELOCs typically have variable rates, but some lenders do offer fixed-rate HELOCs. HELOCs may be ideal for borrowers who need cash to pay for home improvement projects or other financial needs over a long period of time instead of an up-front lump sum.
Home loan calculators and current mortgage rates
Home loan calculators are helpful tools that can give you a better sense of home affordability, monthly payments, and other key loan factors. Here are some home loan calculators to use as you consider a home purchase or refinance:
- A mortgage calculator is a valuable tool to help you understand what your monthly payment will be for principal, interest, property taxes, and homeowner’s insurance.
- An affordability calculator helps you determine how much house you can afford.
- A refinance calculator shows how long until a refinance pays for itself.
- A debt-to-income ratio calculator indicates how much more debt you can take on.
- An amortization calculator shows how much of your payment goes to principal and interest over your loan term.
To compare current interest rates, shop around and apply for a home loan with multiple lenders. When you apply for a mortgage, you’ll receive a Loan Estimate form from the lender. The annual percentage rate (APR) listed on the form includes both the interest rate and the loan fees you’ll pay the lender, as well as mortgage insurance and other borrowing costs. Compare APR amounts to get a complete picture of loan affordability.
To get comparable APRs, all the Loan Estimates should be issued on the same day for the same kind of loan, and use similar amounts for estimated taxes and insurance. The Loan Estimate also indicates how long the current rate is good for. You may be able to lock the rate in for 30, 45, or 60 days.
Do you qualify for homebuyer assistance?
Even if your credit score needs some work or you don’t have a lot of money for a down payment, you may find a loan program that can help you buy a home.
Here are some loans to consider:
- FHA loans are designed for buyers with lackluster credit, a modest income, or limited savings.
- VA loans offer no-down-payment options to make homeownership affordable for military servicemembers and veterans.
- USDA loans are for rural residents and include no-money-down options for low-to moderate-income buyers.
Throughout the United States, there are many first-time buyer programs with down payment assistance or other help. These programs may be offered by the state or local government or by a nonprofit organization. Check with your state’s housing agency to see what programs are available.
Home loan FAQs
How can I get approved for a home loan?
You must meet the required borrowing qualifications for the kind of mortgage you apply for. Programs such as FHA loans may provide more flexible options if you have a lower credit score.
How do you buy a house if you have no money?
The USDA or VA may offer no-money-down loans if you meet their qualifications. Also, check with state and local homebuyer assistance programs to see what other aid is available.
How hard is it to get approved for a home loan?
Lenders want to see that you can handle credit and that you have adequate income to pay your mortgage and other debts. You can improve your chances for approval by taking steps to increase your credit score, paying down debts, and saving for a larger down payment.
What kind of credit score do you need to buy or refinance a house?
The minimum credit score varies by program. Most conventional loan programs require a score of 620 or higher, though.