How to Choose the Right Mortgage: VA, USDA, FHA, Conventional, and Jumbo Compared

RYAN: In this section, let's talk about choosing the right mortgage for you and how to figure that out. There are several types of mortgages out there — each has its own advantages and disadvantages — and so we're going to go in depth about some of the different types of mortgages that are out there and how to better choose which one is best for you. So first, let's talk about the different types of mortgages that exist. Number one is a fixed-rate mortgage. A fixed-rate mortgage is a loan that has a fixed rate — makes sense — meaning that rate will never change. Typically a 30-year fixed-rate mortgage is the most common loan that we do. Second type of loan is an adjustable-rate mortgage. An adjustable-rate mortgage is a loan that has a rate that can adjust. Typically it's fixed for a short period of time in the beginning and then it can adjust each year — sometimes even monthly. Another option for a loan is a government loan. This includes FHA, VA, USDA — those are considered government loans. Typically there's a reason the government's getting involved in those types of loans, and there's a little bit more of an incentive or kind of helping mitigate some of the risk for lenders. So there could be some benefits to doing a government loan as opposed to a normal conventional loan. The fourth option is a conventional loan. A conventional loan includes fixed-rate mortgage, adjustable-rate mortgage — those types of loans. That's typically the loan type that most people will do if they're not doing a government loan. These types of loans typically require a higher credit score or a higher down payment. The last type of loan is a jumbo loan. A jumbo loan is a loan for those that are over the conforming loan limits — meaning each year the government says loans above this amount would be considered jumbo. Anything below that is considered a conforming loan. Jumbo loans do typically have higher interest rates, as they are for those obviously affording a bigger home. So let's go back to those five different types of loans and talk about some of the pros and cons. Let's talk about a fixed-rate mortgage first. Obviously one of the big benefits of a fixed-rate mortgage is the predictability of it. You don't have to worry about things if interest rates change in the market — if you've already locked in a low rate, you're good. Let's dive in a little bit more in detail here to see: if I'm a first-time home buyer and I'm looking to go buy a home, what are my options and how do they compare payment-wise? So I put together this little illustration that outlines the options for a first-time home buyer. Let's start with a VA loan. VA loans are for veterans — those that have served our country — and they get very good rates and have no mortgage insurance. It is by far the best zero-down loan that exists, and rightfully so. In a scenario for a $400,000 purchase price, it's a very good payment compared to the other options. For veterans with good credit, here's where the payment is — and if their credit is not so good, the payment goes up a little bit depending on where their credit scores are. The second loan is a USDA Rural Housing loan — another government loan. The government is trying to encourage people to live in what's considered rural areas. Each state has rural areas in it, and you can go online to check the map that allows you to look at which areas are considered rural to the US government. If you're looking to buy in one of those areas, USDA Rural Housing is a great zero-down loan — not quite as good as VA, but a great loan that allows you to get into a home with zero down. USDA loans are a little bit restrictive on debt-to-income ratios, so it's sometimes harder to qualify. On another loan you may qualify for $400,000, but on a USDA loan you may only qualify for $300,000 — because they're a little more strict on their debt-to-income ratios. This third one here is a zero-down loan — a grant-funded loan through one of our partners, United Wholesale Mortgage. I put this one in here to show you that there are zero-down loan options out there — in fact there's more than just this one depending on which state you're in. This loan is essentially a hybrid conventional loan — normally a conventional loan requires 3% down for first-time home buyers, but instead of you coming up with that 3% down, our lending partner is willing to give you that 3% down as a gift. It is a silent second essentially — up to $115,000 — meaning it sits as a second mortgage on the property which has no interest and no payments due. But it sits there as that silent second, and when you go to pay off the home or refinance, you do have to pay off that mortgage at that point — for the exact balance that you borrowed when you started. The fourth option for a first-time home buyer would be doing a conventional loan. If they don't qualify for the 3% down grant program, they could do the 3% down program, or really for anybody, you can do a 5% down conventional loan. The benefit of doing a 5% conventional loan if you have good credit is that the payment ends up being pretty good and it's easier to qualify for. A conventional loan is not as strict on debt-to-income ratios as a USDA loan, but it's not quite as lenient as an FHA loan. Conventional loans are very credit-driven — if your credit scores are awesome, you're getting a good payment. If your credit scores are not so awesome, the payment goes up. The last section here is FHA. FHA is a great first-time home buyer loan because it only requires 3.5% down. The interest rates on FHA are typically a little bit lower than on a conventional loan because FHA is very lenient on credit scores. If you have a 760 or a 680, typically the interest rate is going to be very similar — whereas on a conventional loan, going from 760 to 680, that interest rate is going to go up. FHA is very lenient when it comes to credit scores and giving you a really good rate for that. I also like that FHA is very lenient on debt-to-income ratios — typically you can borrow more money on an FHA loan than you can on a conventional loan, because they allow for a higher DTI. So you can get approved for more home under FHA than you could under conventional. Hopefully showing you this illustration of how each loan compares to one another is helpful. Again, this is just for informational purposes — rates change, but the difference between programs should stay relatively the same. Hopefully this gives you an idea when trying to figure out what loan may be best for you — which again depends on where your credit scores are, how much money you have to put down, or how much home you're trying to get. This is why when we do the pre-approval process, it's super important to go over all of this to figure out what loan makes the most sense for you.