How to find the best mortgage for you

If you’re thinking about buying a home, one of the first decisions you’ll face is which type of mortgage to get. The right mortgage for you will depend on your financial situation, your priorities, and whether you’re eligible for specific types of loans. Here’s a rundown of some of the most common types of mortgages and what sets them apart to help you find the right one for your needs.

Key takeaways:

• If you have good credit and can afford to make a down payment, a conventional loan is the most popular option.
• Government-backed loans can make it possible to buy a home even if you don’t have good credit.
• A fixed-rate mortgage offers predictable monthly payments, while an adjustable-rate mortgage can save you money in the short term.

If you have good credit and a down payment: Conventional loan

A conventional loan is a mortgage offered by a private lender without government backing. Conventional loans typically have stricter requirements than government-backed mortgages but can be cheaper overall in the long run.

To qualify for a conventional loan, you’ll typically need a credit score of at least 620, a down payment of at least 3% of the purchase price, and a debt-to-income ratio lower than 50%.

If your down payment is less than 20%, you’ll need to pay for private mortgage insurance, which protects the lender if you default on your loan. Your PMI premium will be added to your monthly payment. The good news is that you can get rid of PMI once you reach 20% home equity.

Conventional loans can be a good option for buyers who can meet the financial requirements. They can offer lower mortgage interest rates than other popular options, such as FHA loans. If you qualify, that lower interest rate can help you reduce both your monthly payment and the overall cost of the loan.

If you want predictability: Fixed-rate mortgage

Fixed-rate mortgages are preferred by roughly 90% of buyers. With a fixed-rate mortgage, your interest rate is set when you close on your loan and never changes. As a result, your loan payment will never change.

One of the biggest perks of a fixed-rate mortgage is predictable monthly payments, which can help you budget for the long term. It also protects you against interest rate increases. Please note that if you pay property taxes and homeowners insurance premiums through an escrow account, these factors can change and potentially increase your overall monthly payment.

Home buyers who want a consistent and predictable monthly payment and plan to stay in their forever home should consider a fixed-rate loan.

If you want a low payment to start: ARM

The other type of interest rate is an adjustable-rate mortgage. ARMs typically have an introductory period and an adjustment period.

During the introductory period, you have a fixed interest rate that’s usually lower than you can get for a fixed-rate loan. You benefit from a lower monthly payment. Once the introductory period is over, your interest rate will adjust at regular intervals based on market rates.

Once the adjustment period is over, your monthly payment will adjust accordingly. At some point, it likely will increase, and your monthly payment will follow. ARMs usually have interest rate caps that limit how much your rate can increase with each adjustment and over the life of your loan.

Buyers who purchase a starter home that they plan to move out of within a few years or who plan to pay off their loan early can benefit from the lower early payments and save money. However, if they stay in the home past the introductory period, their interest rate may increase, and they’ll pay a higher mortgage payment.

If you want a lower payment: 30-year loan

Your loan term refers to the time you have to repay your loan, and it has a significant impact on both your monthly payment and the total interest you pay on your loan.

The two most common loan terms are the 15-year and 30-year terms, though Rocket Mortgage^® also offers custom loan terms through its YOURgage® program.

A 30-year loan term reduces your payment compared with a 15-year loan because you’re spreading out your payments across more time. The downside is that you’ll pay more in overall interest.

Borrowers who prefer a manageable monthly payment are more likely to choose a 30-year term.

If you want to pay less interest: 15-year loan

With a 15-year term, your monthly payments will be considerably higher but you’ll pay off the loan more quickly and pay a lot less interest.

Not every borrower can afford the high monthly mortgage payments that come with a 15-year loan term. However, if you can swing it, a 15-year term can save you money on interest and help you build equity faster.

If your credit score is low: FHA loan

A Federal Housing Administration loan allows borrowers to qualify with a lower credit score and a low down payment. Because the loan is backed by the government, it’s less risky for the lender. You can get an FHA loan with a credit score as low as 580 and a minimum down payment of only 3.5%.

FHA loans are the most widely available government-backed loans. Mortgage insurance premiums are required for all FHA loans. If you make a down payment of at least 10%, you’ll pay MIP on your loan for 11 years. If you make a smaller down payment, you’ll pay MIP for the life of the loan. This is why many homeowners refinance from an FHA loan to a conventional mortgage once they reach 20% equity in their property.

FHA loans can help borrowers with past financial missteps and low or previous bad credit achieve homeownership. If you’re looking to buy a home but don’t meet the requirements of a conventional loan, an FHA loan could be a good choice for you.

If you get military benefits: VA loan

Veterans Affairs loans are available only to active military personnel, veterans, and their surviving spouses.

VA loans typically offer lower interest rates than comparable government-backed loans, making them even more affordable. A VA loan can also allow you to buy a home with no money down and avoid mortgage insurance payments. You may need to pay a VA funding fee when you get your loan.

Any qualified military member, veteran, or surviving spouse should consider this type of mortgage. You won’t need to make a down payment and can score a low interest rate to save you money.

If you want a rural home: USDA loan

U.S. Department of Agriculture loans are available to low- and moderate-income borrowers buying a home in a specific rural area. While Rocket Mortgage does not offer USDA loans at this time, they can be a helpful option for borrowers who don’t have much saved to make a down payment. USDA loans are available with no down payment and tend to have lower borrowing costs than FHA loans. However, you’ll need to pay both an upfront fee and ongoing mortgage insurance.

If you can afford a more expensive home: Jumbo loan

A jumbo loan exceeds the limit on conforming conventional loans. Each year, the Federal Housing Finance Agency sets a limit on conforming conventional loans, which lenders can sell to Fannie Mae and Freddie Mac. Jumbo loans are nonconforming loans, which means they cannot be sold to Fannie Mae or Freddie Mac, and the terms and requirements for the loan are entirely up to the lender.

Because these loans are for larger amounts, jumbo loans tend to come with stricter eligibility requirements and higher interest rates. You’ll typically need a credit score of at least 680 and a down payment of at least 10%.

If the home you’re looking to purchase exceeds the conforming loan limits in your area, a jumbo loan may be your best option.

Compare your mortgage options

Let’s look at some of the key differences between the different types of mortgage options and loan term lengths.

Which loan is best for you?

The best loan to buy a house will depend on your financial situation and priorities.

• Conventional loans are the most common type of loan.
• Government-backed loans can be a great option if you don’t meet conventional loan requirements.
• To keep your monthly payment affordable, consider a longer loan term.
• If you can afford to pay more each month and want to save on interest, you’d choose a shorter loan term.
• A fixed-rate mortgage will give you predictable monthly payments, while an adjustable-rate mortgage can save you money in the short term.

FAQ

Here are answers to some frequently asked questions about finding the best home mortgage option for you.

How do you find the best mortgage?

You can find the best mortgage for your situation by understanding the different loan options available and getting quotes from various lenders.

What if I’m not eligible for a conventional loan?

Government-backed loans have looser eligibility restrictions if your credit isn’t so great or you can’t afford a large down payment.

Do you need a 20% down payment for a conventional loan?

You can obtain a conventional loan with a down payment as low as 3%, but you’ll need to purchase PMI if the down payment is less than 20%. One+ by Rocket Mortgage allows borrowers to buy a home with as little as 1% down.

The bottom line

Understanding the different types of mortgage options that are available can help you find the best loan for buying a house. If you don’t qualify for a conventional loan, government-backed loans have looser eligibility requirements. When you take out a mortgage, it’s important to make sure you can afford your monthly payment and know whether your interest rate can change.

Speak with a Home Loan Expert at Rocket Mortgage to get started on your mortgage application.