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Which Mortgage Loan is Best?

If you’re in the market to upgrade your home or are a first time home buyer, you might be confused as to the best mortgage option for your needs. There are many mortgage loans from which to choose.  For first time buyers, the mortgage process might seem daunting. As a first-time homebuyer, you may be eligible for assistance from state programs, as well as tax breaks or federally backed loans. The more you know, the easier it will be to make an informed decision.

First Time Home Buyers 

According to the U.S. Department of Housing and Urban Development (HUD). A first time home buyer is:

  • An individual who has not owned a principal residence for three years. This may also include a spouse.
  • A single parent who has only owned a home with a former spouse while married.
  • A displaced homemaker who has only owned a home with a spouse.
  • An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with relevant regulations.
  • An individual who has a property that was not in compliance with state, local, or model building codes and which cannot be brought into compliance for less than the cost of constructing a permanent structure.

If you are a first time home buyer, you may be eligible for FHA loans or other assistance programs.

FHA Loans  

FHA loans are very popular with first time home buyers. They are insured by the Federal Housing Administration (FHA), and they typically require lower down payments and lower credit score requirements than many conventional mortgage loans. Through the FHA, first time home buyers can buy a home with a minimum credit score of 580 and a down payment of 3.5 percent or a credit score of 500 and a down payment of 10 percent. This may be important to buyers who are cash strapped, as it enables you to borrow up to 96.5 percent of the value of a home if your credit score is 580 or over.

FHA loans are issued by an FHA-approved lender and are designed for low to moderate-income borrowers who may have lower than average credit scores.  The funds don’t actually come from the FHA, but rather a lender, and they are guaranteed by the FHA. Individual lenders, such as your local credit union, will evaluate your qualifications for a loan. In order to secure the FHA guarantee, qualifying borrowers are required to purchase mortgage insurance with premiums being paid to the FHA. They must also have a debt-to-income ratio of <43 percent, as well as proof of income and employment. Down payments may come from savings, investments, a financial gift from family, or a grant for down payment assistance. Because FHA loans are backed, borrowers benefit from lower down payments, low closing costs, and lower credit score requirements. FHA loans are a good option for borrowers who don’t have a down payment or who have credit problems. They can be used to buy, refinance, or renovate a home that will be used as a primary residence. While there are many pros to FHA loans, a con may be the cost of mortgage insurance.

VA Loans

VA loans are backed by the U.S. Department of Veterans Affairs. They are a no down payment loan specifically for military personnel, veterans, and their families. Qualified U.S. military members, both active duty and veterans, as well as eligible family members can apply for these loans. In addition to no required down payment, VA loans also come with lower interest rates than traditional mortgage loans. Like FHA loans, VA loans are made to eligible borrowers by private lenders, such as certain credit unions. A VA loan can be used to buy or build a primary residence or refinance an existing loan. They are meant to help veterans, active duty service members, and widowed military spouses buy a home with no down payment.

Generally, you are eligible for a VA loan if you are:

  • An active duty service member or an honorably discharged veteran who has 90 consecutive days of active service during wartime or 181 days of active service during peacetime.
  • You have served more than six years in the National Guard or Selected Reserve.
  • You are the spouse of a service member who died in the line of duty.

The biggest benefits of a VA loan are the zero down payment requirement and no requirement to pay for private mortgage insurance. While there is no minimum credit score requirement, lenders still take credit score into consideration. Like the FHA loan, there are many benefits. A con to a VA loan is the zero down payment may leave you owing more for your home than it’s worth if the real estate market changes.

Traditional Mortgage Loans

Traditional mortgage loan options include fixed-rate mortgage loans and adjustable-rate mortgage loans (ARMs). ARMs typically have lower initial monthly payments, but the payments can fluctuate and may become unaffordable as time goes on. A fixed-rate mortgage may start out with a higher rate, but the interest rate and monthly payment stay the same for the life of the loan. This provides a more predictable, affordable payment in the long run. While the predictable rates make for easier budgeting, a fixed-rate mortgage may be harder to qualify for.

When shopping for a mortgage, speak to your credit union lender and discuss the options that best fit your current circumstances. As we mentioned above, a fixed-rate mortgage has a set interest rate for the duration of the loan, typically 15 or 30 years, with a fixed monthly payment. An ARM has an interest rate that may change over the course of the loan. If you’re not planning on staying in your home for more than a few years, an ARM may be the most cost-effective option. When comparing mortgage types and rates, ask your lender if the ARM has a rate cap. You will also want to consider what current interest rates look like. Mortgage rates are currently low, which could make that fixed-rate loan an affordable choice.

Speak to a Benchmark Federal Credit Union lender or click to learn more about Benchmark mortgage loans.

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