Mortgages aren’t one-size-fits-all products. Loan types and lenders all have different requirements, benefits and drawbacks.
Some require sterling credit and sizable down payments. Others have looser standards but limit where you can purchase, or come with higher fees. Heck, one loan program is open to only about 1 percent of the population – the veterans and military members who proudly serve our country.
The type of mortgage can affect everything from your purchasing power to your monthly payment. The key is finding the mortgage program that makes the most sense given your particular financial situation, your homebuying goals and how you fit into the qualifying scheme.
To be sure, context and caveats are important when thinking about home financing. But sometimes just taking a cold, hard look at the numbers can also help provide clarity.
Running the Numbers
Let’s look at the four main mortgage options: conventional loans and the trio of government-backed mortgages (FHA, USDA and VA). Credit score requirements will be highest for conventional loans, typically followed by FHA and then VA and USDA.
Conventional borrowers will typically need to make a down payment of at least 5 percent, while FHA borrowers have a 3.5 percent minimum. Borrowers who can’t muster at least 20 percent down on either loan type will also pay mortgage insurance each month. Neither VA nor USDA loans require a down payment.
But all three government-backed loans have an upfront mortgage insurance premium or a funding fee. Most borrowers choose to roll these costs into the loan, which increases the monthly payment.
For our example, let’s assume you’re looking for a $200,000 mortgage at a 4.75 percent interest rate. We’ll use a consistent estimate for monthly property taxes and insurance.