Understanding your home financing options
Getting ready to become a homeowner? Whether you’ve already started doing your research or aren’t quite sure where to begin, we’re here to help you get home. We’ve taken our best homebuying guidance and broken it up into bite-size to-dos.
Mortgages aren’t one-size-fits-all. From affordable lending discounts to adding a co-borrower, this post is all about understanding different financing options and finding the best fit for you.
Your to-do list:
- Learn about different loan products
- Learn about down payment options
- Consider adding a co-borrower
- See if you’re eligible for affordable lending discounts
Learn about different loan products
You have options when it comes to financing your home. Different loan products offer different conditions, such as rate terms, payback periods, and down payment minimums. Let’s take a look at some of the most popular types of mortgages and how they can impact affordability now and throughout the life of your loan:
Fixed and adjustable rate mortgages
With a fixed-rate mortgage, you’ll have the same interest rate for the life of your loan—no surprises. With an adjustable-rate mortgage (ARM), you’ll have a 30-year loan with a lower rate for an initial fixed period. After that initial period is over, the rate will adjust (and typically increase) every 6 months, based on market factors. There’s a predetermined cap that establishes the maximum amount the rate can increase every 6 months, so you’ll know the “worst case scenario” upfront. Better Mortgage offers ARMs with 10-year (10/6m), 7-year (7/6m), or 5-year (5/6m) fixed periods. If you’re confident that you’ll be selling or refinancing within 5-10 years, an ARM could save you thousands. These posts explain how ARMs work and whether they may be a good option for your situation.
15-year and 30-year mortgages
When you borrow money to finance a home, one of the most important terms of the loan is time: namely, how long will you be paying back your lender? With all mortgages, your monthly payments are primarily calculated based on the principal and interest. Longer loan periods tend to offer smaller monthly payments, but shorter loan periods are likely to cost less in the long run because you pay down your principal faster and don’t owe as much interest. With a 15-year loan, for example, you pay down the balance twice as fast as you do with a 30-year loan. There are advantages and disadvantages to each term length—lower monthly payments are more manageable and might even help you afford a larger loan, but longer loans are typically subject to higher interest rates and fees. This post explains more about the pros and cons of different loan terms. Better Mortgage offers 30-year, 20-year, and 15-year fixed-rate mortgages, so you can choose the pace at which you want to pay back your loan and find a balance that works for you.
Conventional and government-insured mortgages
The type of loan you qualify for is based largely on your financial profile. Offered by private lenders and banks, conventional loans are the most common type of mortgage and typically have stricter standards for approval than government-backed loans. The Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and Department of Agriculture (USDA) all offer different insured loan products through approved lenders to borrowers who might not be eligible for conventional home financing based on their credit score or savings. Because these loans are backed by the government, lenders assume less risk in funding them and can offer more favorable terms like lower interest rates and smaller down payments to qualifying borrowers. If you have a less-than-stellar credit score or can’t pay as much upfront for your home, government-backed loan products might be the best financing option for you. Check out the benefits of conventional and government-backed loans in this article.
Learn about down payment options
You may have heard that 20% is the magic number for a down payment. It’s true that putting down 20% or more means you won’t need to pay for private mortgage insurance (PMI) which lenders typically require for loans with smaller down payments. But for borrowers with great credit and a steady income, a 3-5% down loan can be a financially sound option, allowing you to start investing and building equity sooner.
Let’s say you have significant student loan debt, but a stable career with steady income (and the tax returns and pay stubs to prove it). If you live in a city where your monthly rent is high–even higher than what a monthly mortgage payment might be—you may not have had the chance to save up for a 20% down payment. But your income profile, and the fact that you’re already making high rent payments, can be a signal to lenders that you’ll be able to make consistent mortgage payments. Read more about when a 3-5% down payment isn’t a risk to lenders.
Consider adding a co-borrower
Many Better Mortgage customers buy homes with a significant other, family member, or even a close friend by their side. The main benefit of adding a co-borrower is that it brings additional income and assets to the table. This combined income may help you qualify for a larger loan amount since you can afford higher monthly mortgage payments together.
Keep in mind, however, that lenders are required to evaluate the lower credit score between the two of you. That means that if one borrower’s credit score is below the lender’s required minimum score, you still wouldn’t qualify for a loan regardless of how high the other co-borrower's score is. The lower of the two scores will also be used to determine the rates available to you. So if your potential co-borrower’s credit score is significantly lower than yours and you don’t need their additional income to qualify for the loan you want it might be best not to add them to the mortgage.
If it doesn’t make financial sense to add someone to your mortgage, you can still add them to the property's title so they have shared ownership rights to your home. Learn how to add a co-borrower here.
See if you’re eligible for affordable lending discounts
At Better Mortgage, we offer access to a few affordable mortgage options, including Fannie Mae HomeReady loans and FHA loans. Both of these mortgage products come with smaller down payment minimums and more flexible credit score requirements. We generally recommend a HomeReady loan if your credit score is at least 620, since this home financing option allows you to cancel mortgage insurance once your home equity reaches 20%. Read more about the pros and cons of both options here.
Home financing options that work for you
Financing a home is a balancing act, and what works for someone else might not work for you. Finding the right blend of loan type, interest rate, down payment, and term length requires a bit of research and critical thinking about your own financial priorities. Are you willing to spend more money over time in exchange for consistent monthly payments? Is it worth adding a co-borrower to afford a bigger mortgage? At the end of the day, the answers to these questions are deeply personal and will have a lasting impact on the cost of your loan. But working with a lender that puts people first, eliminates unnecessary fees, and offers a variety of loan products will go a long way to making your home financing process smoother. Curious about how much house you can afford? Get pre-approved online in as little as 3 minutes, and take a look at the loan options available to you.