Mortgage options can be dizzying, so how do you decide?
FHA, Fannie Mae, Freddie Mac, VA. Conforming, high-balance conventional, jumbo, super jumbo. The options for mortgages include a plethora of acronyms and jargon, with each choice representing trade-offs. How do you decide what is right for you?
''It's not easy for even experienced homeowners to know all the pieces that go into a mortgage. If it's the first time you're doing it, it can be very daunting,'' said Joe Rogers, an executive vice president at Wells Fargo in Columbia, Md. ''You might end up with a loan that would be OK, but it might not be the best one for you.''
To make the right choice, start by understanding your objectives, what types of mortgage you qualify for, and the benefits and limitations of each option. For instance, a Fannie Mae mortgage allows a smaller down payment as a percentage of your loan, but you can't borrow as much, compared with a mortgage that a bank will hold in its portfolio.
''Educating oneself is really important,'' said Bob Walters, chief economist for Quicken Loans. ''Talk to a couple of mortgage bankers until you feel comfortable with one. That's going to be the best source of information.''
You may think that a low rate is the key. But you should also consider limits on the size of the mortgage, the amount of down payment, mortgage insurance costs, your credit rating, and any fees that will be included in the closing costs.
Before you start looking seriously at homes, evaluate the mortgage options. Obtain a preapproval letter so you'll be prepared to make a strong offer when you fall in love with a house.
If you qualify, the original no-down-payment mortgage that the Veterans Affairs Department offers to military veterans is often a winning choice. Rates are low, some closing costs may be financed, and you generally can borrow without a down payment. When Rogers makes presentations to Wells Fargo mortgage consultants, he emphasizes they should explore a VA mortgage.
''What are the first four words you should say to any customer?'' he asks them. ''Are you a veteran?''
Technically, VA loans aren't limited in size, but if you need to borrow more than $417,000, you may need to put down some money.
And even above that limit, the VA down payment will be small, compared with other mortgage options: For a $1 million property, you'd put down $39,100, he said. Credit quality doesn't affect your interest rate with VA loans the way it would with conventional financing. All VA borrowers pay a one-time fee for the VA guarantee.
If your goal is to put as little money down as possible and you haven't used your veterans' mortgage benefit, or had your eligibility reinstated, this most likely will be the best choice.
During the housing crisis, the government stepped in to guarantee more than 90 percent of the mortgage volume. As part of the Obama administration's strategy to reduce this government support, policies for Federal Housing Administration mortgages are getting stricter, and costs are rising.
You'll be paying a mortgage insurance premium for the life of the loan, unlike with mortgages that conform to Fannie Mae and Freddie Mac standards. Homeowners with a Fannie or Freddie mortgage can cancel the insurance after the balance on the loan falls to 80 percent of the home value, known as the loan-to-value ratio (LTV). That can happen through a rising market or by paying down the principal balance.
Even though it's appealing to surrender only the 3.5 percent required as a down payment for FHA loans, you might be better off saving up the additional 1.5 percent to qualify for a conventional mortgage with better rates, lower insurance fees, and lower closing costs. In addition, the FHA takes more time with the appraisal, home inspection, and closing — a delay that could hurt you in a competitive sales market.
On the plus side, if your credit isn't stellar, FHA won't penalize you by raising your interest rate. Technically, your FICO score could be as low as 580, although most lenders require at least 620, said Keith Gumbinger, vice president at HSH.com, a mortgage information website.
The most common mortgage is a conforming conventional loan, which means it meets Fannie and Freddie standards. Banks can sell these loans to Fannie and Freddie, which package them and sell them to investors. They charge a guarantee fee estimated at 0.5 percent, added to your rate. Typically, you need 5 percent down and good credit. You can borrow as much as $417,000.
If your credit is borderline, especially with a low down payment, you will pay more in the form of higher rates.
A conforming loan isn't always sold to Fannie or Freddie. Some banks hold conforming mortgages in their portfolios, in which case they may be more competitive with rates.
High-balance conforming mortgage
It, too, can be purchased by Fannie or Freddie. The difference is that the maximum loan amount rises in steps to $625,500, depending on where you live. But be prepared to put down 10 to 20 percent and demonstrate through income and credit scores a greater ability to repay.
If you have excellent credit and a large down payment, you can lower your rate as much as 1.25 percent. Once you pay down your mortgage to 80 percent or rising home values get you to that threshold, you can request to cancel your mortgage insurance.
For most buyers with decent credit and money for a down payment, this is the best mortgage choice. You also may have an advantage in a fast-moving real estate market, in which sellers may consider FHA or VA financing a disadvantage.
If you want a single mortgage larger than $625,500, the only choice is a jumbo loan. Rates are typically higher, but in recent weeks, they have fallen dramatically — the result of growing interest in jumbo mortgages and the market's expectation that the Federal Reserve will reduce its purchases of bonds. Many data sources show jumbo rates are higher than conforming ones, but the Mortgage Bankers Association says jumbo rates are lower than conforming rates for the first time in history.
Jumbo borrowers need to put more money down, have excellent credit, and go through a rigorous documentation and underwriting process. Most jumbo products require a credit score of 700 or 720 and a down payment of 20 to 40 percent. If you can't afford a down payment that large, you might take out as much as you can with a high-balance conforming loan and borrow the rest as a home-equity line of credit.
Whatever you do, you're better off with the guidance of a mortgage banker you trust. You can learn a lot on the Internet, but ultimately, a conversation with a professional lets you compare products tailored to your situation.
''Find a person who is asking you a lot of questions about what your situation is — to find out the best choice for you — rather than just quoting you a rate,'' Walters said. ''It can be frustrating at first when somebody is asking a lot of questions. That tells you you're dealing with a professional. You wouldn't want to go to a doctor who didn't examine you and just said, 'How do you feel?' "