One of the first steps potential home buyers are encouraged to take is getting their financing (aka mortgage) set up early in the buying process. Why? In the crowded Louisville area market, or any competitive market, having your mortgage pre-approved and ready to go can help speed up the process and eliminate risks of losing your dream home to another buyer.
There are a variety of home loans available, so finding the one that works best for your family is important.
Choice 1: Fixed rate or adjustable?
- Fixed-ratemortgage loans have the same interest rate for the entire repayment term. So your monthly payment will stay the same, month after month, and year after year.
- Adjustable-rate mortgage loans (ARMs) have an interest rate that will change or “adjust” from time to time. A hybrid ARM loan is one that starts off with a fixed or unchanging interest rate, before switching over to an adjustable rate.
Choice 2: Conventional or government-insured?
- A conventional home loan is one that is not insured or guaranteed by the federal government in any way.
- An FHA loan is offered by the Federal Housing Administration (FHA) mortgage insurance program, which is managed by the Department of Housing and Urban Development (HUD). FHA loans are available to all types of borrowers. The government insures the lender against losses that might result from borrower default.
- A VA loan is offered by the U.S. Department of Veterans Affairs (VA) to military service members and their families. Similar to the FHA program, these types of mortgages are guaranteed by the federal government. This means the VA will reimburse the lender for any losses that may result from borrower default.
- A USDA/RHS loan is offered by the United States Department of Agriculture (USDA) for rural borrowers who meet certain income requirements. The program is managed by the Rural Housing Service (RHS), which is part of the Department of Agriculture. This type of mortgage loan is offered to rural residents who are unable to obtain adequate housing through conventional financing.
NOTE: Borrowers can also combine mortgage types. For example, you might choose an FHA loan with a fixed interest rate, or a conventional loan with an adjustable rate (ARM).
Choice 3: Jumbo vs. Conforming Loan
- A conforming loan meets the underwriting guidelines of Fannie Mae or Freddie Mac. Fannie and Freddie are the two government-controlled corporations that purchase and sell mortgage-backed securities (MBS). A conforming loan falls within their maximum size limits, and otherwise “conforms” to pre-established criteria.
- A jumbo loan, on the other hand, exceeds the conforming loan limits established by Fannie Mae and Freddie Mac. This type of mortgage represents a higher risk for the lender, mainly due to its size. As a result, jumbo borrowers typically must have excellent credit and larger down payments, when compared to conforming loans. Interest rates are generally higher with the jumbo products, as well.