What is a Mortgage?
A mortgage is a financial agreement where you borrow money to purchase a home, agreeing to repay the loan with interest over a set period. Your mortgage payment generally includes two main components:
- Principal: The original amount of the loan.
- Interest: The cost of borrowing, calculated as a percentage of the principal.
The Annual Percentage Rate (APR) reflects the total cost of the loan, including both interest and any additional fees. Mortgage payments are typically made monthly and follow an amortization schedule, which details how your payments are split between principal and interest over the life of the loan.
Types of Mortgages
Each mortgage type has its own requirements and benefits. Here’s a detailed overview:
1. Conventional Mortgages
Description:
- Not backed by the federal government.
- Ideal for borrowers with strong credit, stable employment, and the ability to make a substantial down payment.
Cost Overview:
| Down Payment | Minimum Credit Score | PMI | Features |
|---|---|---|---|
| 20% | Excellent | Required if < 20% down | Avoids PMI with a higher down payment |
2. Conforming Mortgage Loans
Description:
- Must meet specific loan limits set by the Federal Housing Finance Agency (FHFA).
- Eligible for repurchase by Fannie Mae and Freddie Mac.
Cost Overview:
| Down Payment | Minimum Credit Score | Loan Limit (2024) | Features |
|---|---|---|---|
| 3-5% | 620 | $766,550 | Adheres to FHFA limits, varies by location |
3. Non-Conforming Mortgage Loans
Description:
- Not eligible for purchase by Fannie Mae or Freddie Mac.
- Includes Jumbo loans, which exceed conforming limits.
Cost Overview:
| Down Payment | Minimum Credit Score | Interest Rate | Features |
|---|---|---|---|
| 10-20% | 680 or higher | Higher | Larger loan amounts, higher risk for lenders |
4. FHA Loans
Description:
- Insured by the Federal Housing Administration.
- Designed for lower-credit borrowers with less money for a down payment.
Cost Overview:
| Down Payment | Minimum Credit Score | Upfront MIP | Annual MIP | Features |
|---|---|---|---|---|
| 3.5% | 580 | 1.75% | 0.55% | Flexible credit and down payment requirements |
5. VA Loans
Description:
- Guaranteed by the U.S. Department of Veterans Affairs.
- Allows 100% financing with no down payment and no PMI or MIP.
Cost Overview:
| Down Payment | Minimum Credit Score | Funding Fee | Features |
|---|---|---|---|
| 0% | 620 | Varies | No PMI, reduced closing costs, competitive rates |
6. USDA Loans
Description:
- Guaranteed by the U.S. Department of Agriculture.
- Aimed at low-income buyers in rural areas with minimal down payment requirements.
Cost Overview:
| Down Payment | Minimum Credit Score | Upfront MIP | Annual MIP | Features |
|---|---|---|---|---|
| 0% | 640 | 1% | 0.35% | Rural area focus, low down payment |
Types of Mortgage Rates
Fixed-Rate Mortgages
Description:
- Interest rate remains constant throughout the loan term.
- Available in various terms, typically 10 to 30 years.
Cost Overview:
| Term | Interest Rate | Monthly Payment | Features |
|---|---|---|---|
| 15 years | Lower | Higher | Faster equity build-up |
| 30 years | Higher | Lower | Lower monthly payments |
Adjustable-Rate Mortgages (ARMs)
Description:
- Fixed interest rate for an initial period, then adjusts periodically.
- Typically lower initial rates but can increase after the fixed period.
Cost Overview:
| Initial Fixed Period | Adjustment Period | Interest Rate Cap | Features |
|---|---|---|---|
| 3-10 years | Annual or 6-month | Limits on rate increases | Lower initial rates |
First-Time Buyer Assistance Programs
Description:
- Programs offer help with down payments and closing costs for first-time buyers.
- Often based on income or financial need.
Cost Overview:
| Program Type | Assistance Provided | Eligibility | Features |
|---|---|---|---|
| Grants | Down payment | Income-based | Reduces upfront costs |
| Subsidies | Closing costs | Financial need | May cover a portion of costs |
Key Takeaways
- Down Payment Requirements: Range from 0% (VA, USDA) to 20% (Conventional).
- Credit Scores: Minimum scores generally around 620, but vary by loan type.
- Mortgage Insurance: Required for loans with less than 20% down (PMI for Conventional, MIP for FHA).
- Loan Features: Include special programs for military personnel, first-time buyers, and rural areas.
Best Home Loan Providers
1. New American Funding
FICO Credit Score: 620
Minimum Down Payment: 3%
Loan Types Offered: Conventional, FHA, VA, etc.
Pros:
- Wide variety of loan options.
- Specializes in minority borrower loans.
Cons:
- Fees are not disclosed upfront.
Alternative: Ally Bank (no lender fees).
2. NBKC Bank
FICO Credit Score: 620
Minimum Down Payment: 3%
Loan Types Offered: Conventional, FHA, VA
Pros:
- Simple online application process.
- No lender fees on VA loans.
Cons:
- Loan fees are not transparent.
- Does not offer USDA loans.
Alternative: AmeriSave Mortgage (offers USDA loans).
3. Rocket Mortgage
FICO Credit Score: 620
Minimum Down Payment: 1%
Loan Types Offered: Conventional, FHA, VA
Pros:
- User-friendly digital application.
- Excellent customer service.
Cons:
- No in-person service.
- Does not offer USDA loans.
Alternative: New American Funding (offers USDA loans and home equity options).
4. Farmers Bank of Kansas City
FICO Credit Score: 620
Minimum Down Payment: 3%
Loan Types Offered: Conventional, FHA, VA
Pros:
- Online application process with 24/7 status tracking.
- Flexible communication options.
Cons:
- Limited branch locations.
- No automatic payment discount.
Alternative: Citizens (offers a discount for automatic payments).
5. First Federal Bank
FICO Credit Score: 620
Minimum Down Payment: 3%
Loan Types Offered: Conventional, FHA, VA
Pros:
- Specializes in VA and harder-to-find loan options.
- Flexible underwriting.
Cons:
- Rates and fees not publicly disclosed.
- Limited branch locations.
6. Veterans United Home Loans
FICO Credit Score: 620
Minimum Down Payment: 0% (VA loan)
Loan Types Offered: Conventional, FHA, VA
Pros:
- Specializes in VA loans.
- No minimum loan amount.
Cons:
- No home equity loans or lines of credit.
Alternative: Navy Federal Credit Union (offers Military Choice loans).
7. Guaranteed Rate
FICO Credit Score: 620
Minimum Down Payment: 3%
Loan Types Offered: Conventional, FHA, Jumbo, Interest-only
Pros:
- Fully remote closing process.
- Wide range of mortgage options.
Cons:
- No traditional home equity loans.
- No USDA loans.
Alternative: Farmers Bank of Kansas City (offers home equity loans).
Key Takeaways
Loan Features: Include special programs for first-time buyers and military service members. loan-to-value ratio.
Down Payment Requirements: Vary from 0% (VA, USDA) to 20% (Jumbo).
Credit Scores: Minimum typically around 620, with some variations based on loan type and lender.
Mortgage Insurance: Required for loans with less than 20% down (PMI for Conventional, MIP for FHA).
The Bottom Line
You may be eligible for one or more types of mortgages, depending on your income, credit history and credit score, and employment. Mortgage lenders can help you analyze your finances and determine the most suitable loan products. They can also help you better understand the qualification requirements, which can sometimes be complex.
Also note that it can be advantageous to pursue financing before you start looking at homes and making offers. You’ll be able to act more quickly and may be taken more seriously by sellers if you have a pre-approval letter in hand.