Shopping for Home Mortgage Loans

Shopping for home loans gives you a clear picture of how much home you can afford and the mortgage payments you are expected to pay monthly.

The best time to start shopping for house loans is within 90 days of buying your home.

Understanding How Mortgage Loans Work

A mortgage is a contract between you (borrower) and a lender to loan you the money to buy a home. Home mortgages terms can either be 10, 15, 20, or 30 years during which you will make monthly payments to cover:

• Principal. The loan amount excluding the interest.
• Interest. The finance charge on the loan. It is based on the annual percentage rate (APR) charged by the lender.

The deed of your home remains in the possession of the lender until you pay the mortgage in full. If you default on your payments, the lender has the right to repossess your home.

How to Shop for Home Mortgage Loans

All banks and mortgage companies offer different rates so shopping for home mortgage loans can save you a lot of money. How do you shop?

1. Determine how much down payment you can afford for the house.

You will know the amount of your down payment depending on the type of home loan you qualify for. A down payment for a house is typically a minimum of 3% to 5%.

Many home buyers target a 20% down payment if their financial situation can afford it to have a lower mortgage amount

2. Check your Credit Score

Banks and mortgage companies will check your credit score to decide if you are qualified for a home loan.

Your credit score is an important factor that determines which loan program is best for you. It also impacts the interest rate you will be offered by mortgage companies. Typically, the higher your credit score, the lower the interest rates that will be offered to you.

Home mortgage companies review your credit score from Experian, Equifax, and TransUnion. They will then use the middle score of these three credit bureaus to determine your home loan approval and interest rate.

3. Learn about the types of home mortgages

Understand the different types of home mortgage programs and apply for the mortgage program that is a perfect fit with your financial circumstances.

Conventional Loans

• The most popular home mortgage loan.
• It is not guaranteed by any government agency.
• It is offered by banks, mortgage lenders, and credit unions.
• It is subject to loan limits.
• It is typically a fixed-rate mortgage.
• Requires a FICO® Score or credit score of 620 or higher

It can be difficult to qualify for a conventional home mortgage loan because it comes with stricter requirements (bigger down payment, higher credit score, lower debt-to-income ratio, and sometimes requires private mortgage insurance (PMI).

Conventional home mortgage loans are less costly than government-insured loans.

Government-insured Loans

These types of home loans are guaranteed by government agencies. A government-insured loan also comes from private lenders but it is a solution for homebuyers who may not be approved for conventional loans.

FHA Loans

• The home loan is guaranteed by the Federal Housing Authority.
• Requires a down payment of only 3.5% of the home purchase price.
• Best home loan for low-income homebuyers and those with low credit scores.
• Offers lower amounts than conventional loans.
• Has less stringent qualification criteria than conventional loans.
• Requires two types of FHA mortgage insurance.
• FICO® Score or credit score of at least 580 (or 10% down payment for a FICO® Score as low as 500)

It is easier to qualify for FHA loans than conventional loans and is ideal for first-time homebuyers.

 

VA Loans

• Home loans are guaranteed by the U.S. Department of Veterans Affairs to qualified military borrowers.
• Does not require any down payment.
• Does not have loan limits.
• FICO® Score or credit score of 620 or higher

 

The uniformed branches that can avail of VA home loans include:

• Army
• Navy
• Air Force
• Marines
• Coast Guard
• National Oceanic Atmospheric Administration (NOAA)
• Public Health Service (USPHS)

To be eligible for a VA home loan, the borrower needs to have s enough proof of military service (2 years for regular service members, 6 years for Reservists and National Guard members, 90 days active duty during wartime, and 181 days active duty during peacetime.

 

USDA Loans

• This home loan is guaranteed by the U.S. Department of Agriculture (USDA).
• Does not require a down payment.
• Comes with strict income limits as per family size.
• Does not have set loan limits but the loanable amount is based on the borrower’s income.
• FICO® Score or credit score of 640 or higher

This home loan is designed for low-income borrowers who wish to purchase homes in selected rural areas across the country.

4. Interest Rates

Regardless of the type of home mortgage you qualify for, your loan will either be any of these:

Fixed-rate Mortgage

• Interest rate is the same over the entire term of the loan.
• Higher interest rate than an ARM.
• Comes with loan terms of 10, 15, 25, and 30 years.

The fixed-rate mortgage is the most popular type of home loan because of the predictable monthly payment that will not change until the loan is fully paid.

You can choose between these types of fixed-rate mortgages:

• A short-term fixed rate is ideal when you want to fully-pay your loan faster and are willing to make higher monthly payments.
• A long-term fixed rate is best when you want the lowest monthly payments possible or if you are loaning a larger amount.

Adjustable-rate mortgage (ARM)

• Comes with fluctuating interest rates.
• Interest rates change based on current market rates.

The frequency with which the interest rate can change is expressed as 5/1 or 7/1. A 5/1 ARM loan means, your interest rate is fixed for the first five years, after which the rate can change every year depending on the current market rates.

 

5. Compare Mortgage Lenders

You can request quotes from at least 3-5 lenders consisting of:

• Banks
• Mortgage Banks
• Mortgage Brokers

 

6. Compare Closing Costs

Closing costs vary depending on the type of home mortgage loan you apply for. They are a certain percentage of your loan amount. Closing costs are either guarantee fees or mortgage insurance.

• Private Mortgage Insurance (PMI). This is typically between $30 and $70 per month for every $100,000 loan amount.
• FHA mortgage insurance. Regardless of your down payment, you will need to pay these two types of FHA mortgage insurance.
  • Upfront Mortgage Insurance Premium (UFMIP). This is 1.75% of your loan amount.
  • Mortgage Insurance Premium (MIP). This is an annual insurance premium you need to pay which ranges from 0.45% to 1.05%, depending on your down payment and loan term. This is paid in 12 equal payments and added to your monthly mortgage payments.
• VA Funding Fees. This replaces the mortgage insurance and ranges from 2.3% to 3.6% of your loan amount.
• USDA Guarantee Fees. Borrowers are charged 1% upfront guarantee fees and a monthly guarantee fee equivalent to 0.35% of the loan amount.

 

Bottom Line

Shopping for home mortgage loans does not need to be stressful and daunting. When you understand how mortgages work, the types of loan mortgages you can qualify for, interest rates, and closing fees, you can take the guesswork out of buying your dream home.