Choosing the Right Mortgage Plan

There are so many things to consider when you are trying to buy a home. You want to find a place that is the right size and in the right location. Does it meet your list of “must haves” and can you make a home for yourself there? Many of these things you spend time thinking about are fun and exciting, but there is another side of the home buying process that isn’t quite as glamorous. Beyond decided what your budget is for a wise purchase, you also must choose the right mortgage plan that is best suited for you and your household. 

Types of Loans

There are multiple types of loans to choose from, and here is a list of a few common ones. While you might not be eligible for each one, it helps to know what your options are. 

Conventional Loan – This is the most typical type of loan out there. It is a fixed rate, meaning your mortgage payment will not change over time, so you know exactly what you will be paying every month. You can get this in a 10, 15, 20, 30, and 40 year term plan, 30 years being the most common. 

Interest Only – With this option, you can set a designated about of time (typically 5 or so years) where you only pay the interest on your loan. Afterward, you will begin making paying of the principal of the loan. 

Adjustable Rate Mortgage (ARM) – This loan option allows you to pay a fixed interest rate for a specified amount of time, but after that, the interest rate will adjust based on various outside factors like the economy. Your interest rate can change continuously for the remainder of your loan term. 

FHA Loan (Federal Housing Administration) – This loan comes with built in mortgage insurance and usually requires a lower cash down payment than many other loan types. 

VA Loan – This type of loan is designed to assist armed forces veterans and/or their spouses in guaranteeing them a mortgage loan by the Department of Veteran Affairs. These loans do not require a down payment.  

Aside from knowing what type of loans are available to you, knowing your financial situation is going to dictate your loan options and will help pave your home buying process. You need to make yourself aware of the following factors. 

Budget

Knowing how much you can afford is a crucial part of house shopping, but it is also a massive factor in what type of loan you will get approved for. As a rule of thumb, you should not expect to get approved for a mortgage that is more than %27 of your total gross income. 

Cash

The type of loan you are eligible for will vary based on how much cash you have available for a down payment. There are loans that do not require any down payment and whether or not those are available to you is dependent on several factors like your current debt. Other loans require various amounts of cash for a down payment which could span between 3-20 percent. 

Debt

Before you go to a lender, you will want to be aware of all of your debt and monthly payments. Your loan eligibility is likely going to be dependent on your debt to income ratio, which is the total amount of monthly payments compared to your gross income. Your lender will, at the very max, allow you to have no more than a 43 percent debt to income ratio including your mortgage.  In order for you to have a relative understanding of what you will be approved for, calculate every payment you have (student loan, car, credit card, etc) and compare that to your gross income. If these minimum payments already make up too large of a chunk of your income, you might need to focus on either reducing your debt or raising your income in order to get approved for the mortgage loan you are hoping for.