Types of Mortgage Loans: Which One is Right for You?

Buying a home is a process which demands a large amount of time and preparation. First, you need to settle on a price range. Then, you need to find a neighborhood in the right area. Only then can you begin looking for a house that will suit your needs. Even after you find the right house, paying for it can still be a major ordeal.

Purchasing a new home will require a sizable amount of your finances. In fact, your initial house down payment might just be the most amount of money you've ever invested at one time, and that's only the beginning. Most homeowners take out a mortgage loan in order to purchase a house but if this is your first time, you might have no idea what the best kind of mortgage loan is for you. Read on to learn more about the different types of mortgage loans in Minnesota.

Types of Mortgage Loans Explained

• Conventional Loans - A conventional mortgage loan is one obtained from a private lender such as a bank. Depending on the conventional loan, they may or may not conform to the standards established by the Federal Housing Finance Agency (FHFA). There is a lot of variety amongst conventional loans; most of them will demand a FICO score of at least 620. Some will require you to pay as little as 3% down, though most will force you to pay private mortgage insurance if you don't place a down payment of at least 20% on the home you're buying. These monthly PMI payments are designed to reimburse the lender in case you end up defaulting on your mortgage. While PMI turns many buyers away, there are definite advantages to conventional loans as well. Conventional loans can be used for virtually any kind of home purchase and the borrowing costs are usually lower than those of other mortgages. Plus, if you're really worried about PMI, many lenders will cancel your PMI once you've paid 20% of your home's equity.

• Fixed-Rate Mortgage - As the name suggests, a fixed-rate mortgage is a type of loan where you make the same mortgage payment every month. Most fixed-rate mortgages come in either 15 year or 30 year terms. Because your monthly payments won't fluctuate as they will with many other kinds of loans, a fixed-rate mortgage is a safe bet if you want to know exactly how much of your monthly income is going toward paying off your loan. If you're planning to stay in your home long-term, this type of mortgage is right for you.

• ARMs - An adjustable-rate mortgage is one where your monthly payments may increase or decrease based on the state of the local housing market. Some ARMs will start off with a fixed rate for a period of a few years before transitioning to a fluctuating monthly rate. ARMs might be risky for long-term homeowners since you never know how the housing market is going to change with time. But if you're only planning to live somewhere for a few years, an ARM might help you save money on interest payments.

• FHA Loans - A Federal Housing Administration loan is the best kind of mortgage loan for you if you have a below-average credit score or are unable to make a large down payment. An FHA loan is the most common type of government-insured mortgage, and is designed to help those with fewer financial resources than most private lenders demand to afford better housing. If you have a FICO score of 580, an FHA loan will allow you to make a down payment as low as 3.5%. If you're able to make a 10% down payment, the FHA will approve you for a loan even if your credit score is only 500.

• USDA Loans - If you're looking for mortgage loans in Minnesota that will help you purchase a home in a rural area outside the Twin Cities, you should consider applying for a US Department of Agriculture loan. USDA loans are designed to encourage low-income and middle-income buyers to move out of urban areas to avoid overcrowding. Because they're designed to help low-income families, USDA loans often require no down payment when buying a house. However, you will still have to pay an initial fee equivalent to 1% of the loan amount along with an annual fee.

• VA Loans - If you are a military veteran, an active-duty service member or a military family member, a US Department of Veteran Affairs loan is probably the best kind of mortgage loan for you. While only a select few will qualify for a VA loan, those who do won't find a better option anywhere else. VA loans require no down payment and no mortgage insurance. Additionally, most lenders will offer low rates and accept low credit scores.

• Jumbo Loans - A jumbo mortgage loan is one that does not conform to the FHFA's standards. As you may have guessed by the name, these loans are generally given to individuals with higher incomes and credit scores in order to purchase real estate in expensive areas. In Minnesota, you may want to take out a jumbo loan if you're trying to purchase a luxury home in high-cost areas such as Uptown Minneapolis, Edina or Wayzata. Jumbo loans generally have much stricter qualifications than FHFA-conforming conventional loans do. Most will require a FICO score of at least 700, a down payment of 10-20% and significant financial resources. Still, if you're trying to buy an expensive home, a jumbo loan is probably your best bet.

  
  

  Home Buying & Mortgage Lending Assistance in the Twin Cities

  If you're trying to purchase a new home in the Minneapolis-St. Paul metro and you're looking for a great realtor to help you out, look no further than Chris Fritch Team. Using our connections to reputable mortgage lenders, we can help you find your dream home and secure the perfect housing loan. Contact Chris Fritch Team with eXp Realty today for first class home buying and mortgage lending assistance in the greater Twin Cities area!