Mortgage Options

According to a study done in 2017, only 21% of people in the U.S. bought homes all in cash. 78% of them purchased homes with a mortgage in 2018. Ideally, most people need a mortgage to buy their first homes.

For first time home buyers, it is essential to know what loan options you have. Before anything, you need to know your credit score and see where you stand. Your credit score is crucial as it determines if you qualify for a loan or not. You can have a look at LetMeBank on loan options even for people with bad credit scores.

Mortgage loan types

1. Fixed-rate loans

These particular loan types have a fixed interest rate. You pay the same interest rate monthly until you fully pay the mortgage. The terms are also fixed; they can be 5-year, 10-year, 20-year, 30-year or more.


2. Adjustable-rate mortgage(ARM)

Just as the name suggests, the loan ‘adjusts’ from time to time. In most cases, first home buyers are not advised to go for this option because they may end up paying much much more in the long run.

The rate of an ARM may adjust on an annual basis. Some common letters to note are, the ARM can be indicated as 4/26. This means the loan will have a fixed rate for four years and an adjustable-rate for the remaining 26 years.

Some of the factors that lead to the rate adjusting are the index and a set margin. Mostly, the mortgage is tied to either of these three indexes: the treasury bills, LIBOR (London Inter-Bank Offered Rate) or COFI ( 11th District Cost of Funds Index.)

Note that, the index rate can change, but the margins don’t. For example, if the index is 6% and the margin is 4%, then the mortgage interest rate changes to 10%. If the index is at 3%, then the interest rate goes to 7% because the margin is constant.


3. Interest-only mortgage

For this particular option, you only pay the interest for the first 5 or 10 years instead of the typical full monthly payment. After the specific years, you can now pay your monthly payments in full.

4. Government-insured loans

There are various government loans offered to people who want mortgages.

FHA Loans

Federal Housing Administration loans are usually managed by the Department of Housing and Urban Development (HUD.) This type of loan is designed for low to moderate-income borrowers. What’s good about these loans is that they require lower down payments and credit scores.

Currently, (2019) you can borrow up to 96.5% of the home’s value with the remaining 3.5% being the down payment you’ll require.

For you to access an FHA loan with the 3.5% down payment, you need a credit score of 580 and above. You can still obtain the loan if you have a score of 500, but you’ll need a 10% down payment.

V.A. Loans

These loans are specifically for veterans, military service members, select surviving member (as long as they don’t remarry.)

The eligibility depends on how long a V.A. has been in service. There are different loan options: Purchase Loans and Cash-Out Refinance, Native American Direct Loan, Adapted Housing Grants, and Interest Rate Reduction Refinance Loan.

As a veteran, you don’t require a good credit score, but lenders will generally have internal loan requirements of 620 or higher.

In most U.S. counties, the maximum loan limit is $484, 350. For high-cost areas, the limit is $726,525.

USDA/RHS Loans

These are loans specifically for people living in rural areas who meet specific income requirements.

People who live in rural areas but have a modest or steady income are the ones who qualify. Note, the income must not be higher than 115% of the adjusted area median income per county.

Those eligible qualify for a 90% loan. To check your eligibility, you can click here for more details.

5. Conforming and nonconforming loans

Conforming loans are the ones that adhere to the standards set out by the Federal Housing Finance Agency. There is a set limit of $484, 350 which could go up to $726,525 in high-demand housing areas. The best thing about conforming loans is that you are more likely to qualify than the rest.

Nonconforming loans are those above the conforming loan limit. They are often referred to as ‘jumbo’ loans. In most cases, the down payment is usually 20% or more. The terms are more strict which means the higher interest rates.

Taking out a mortgage is a great way to own your first home. The above options are available, and you can choose what suits you. We’ve compiled a list for better shopping options. This helps you make wiser decisions when it comes to knowing what type of home you qualify for.