For any potential home buyer, choosing the best mortgage is a huge step. Unless you can throw down an all-cash offer, you need to be wise in who you choose to be your financial partner. Keep reading below to learn more about mortgages and how to find one that works best for you. 

The Mortgage Basics

Mortgage payments are broken down into two parts: the principal and the interest. The principal is the total loan amount, and the interest is the extra amount you’ll need to repay over a period of time. Payments to both will be made on a monthly basis based on the schedule the lender gives you. 

Mortgage Types 

Conventional 

These loans are not supported by the federal government. If a prospective buyer has good credit, consistent employment, and can make a down payment of 3%, the buyer usually qualifies for a conventional loan from Fannie Mae or Freddie Mac. 

Conforming  

These loans have limits set by the federal government and depend on the buyer’s geographic location. The Federal Housing Finance Agency sets the standard loan limit, and in 2022 the limit is $647,200 for one-unit properties. Exceptions to this limit exist in places like NYC and San Francisco. 

Nonconforming 

Nonconforming loans aren’t usually bought or sold by Fannie Mae and Freddie Mac because of underwriting guidelines. The most common example of nonconforming loans are jumbo loans. They’re called jumbo because they exceed the number of conforming loan limits. 

Federal Housing Administration (FHA) Loans 

A lot of times when buyers can’t get a conventional loan, they’ll turn to the FHA. The down payment can be as low as 3.5% of the home’s price. The FHA has easier credit score minimums than other loan options, but they don’t lend money directly. The FHA works with lenders, but all borrowers have to pay a mortgage insurance premium (MIP) upfront. 

Veterans Affairs (VA) Loans

Homebuyers with military service experience can get loans from the U.S. Department of Veterans Affairs. There is no down payment required, and the closing costs and interest rates are usually less expensive as well. VA loans do come with a funding fee, which is a percentage of the total loan amount. 

So, which is the best mortgage option for you? 

Now that you have a better idea of the different types of mortgages available, choose the best option for you. Depending on your income and previous work experience, you could be one step closer to financing a great new home.