For a first-time mortgage applicant, the intricacies involved in picking the right mortgage option may be more than a daunting task. In order to understand the basic elements in a mortgage loan application, it is crucial to first understand the different types of loan options available to the home-buyers.
The primary choice that a home-buyer has to make is to pick between either a fixed rate mortgage loan or an adjustable rate mortgage loan. While fixed rate loans are where the repayment amount per month and the interest rate is standard throughout the tenure of the loan, in an adjustable rate loan the homebuyer would be subject to a varying repayment amounts and fluctuating interest rates. In between the two, a home buyer also has the option to choose a hybrid plan wherein the repayment amount and the interest rate would be set as a standard for a specific amount of time, say for a period of five years, after which both the rates would vary. A home buyer can pick the apt plan based on the mortgage amount applied for, as well as by factoring in the other personal commitments that one may have alongside the tenure of loan.
The second choice that a home buyer would have is to pick between a conventional mortgage loan or a government insured mortgage loan. A conventional loan does not encompass a federal government guarantee. On the other hand, a government insured loan is where a homebuyer can choose between Federal Housing Administration (FHA), US Veteran Affairs (VA), or United States Department of Agriculture (USDA) loans. Each government loan has its own set of eligibility requirements that are to be strictly met in order to get a sanction.
The third choice that a home buyer has is to pick a jumbo or conforming loan. Based on existing criteria, a conforming loan is dependent on the two government controlled organizations, i.e. Fannie Mae and Freddie Mac which are involved in the purchasing and selling of mortgage backed securities (MBS). The jumbo loan is for huge amount loan seekers. These jumbo loans are granted based on the credit score of the applicant.
Apart from understanding the basic mortgage loan modules, a home buyer has to prepare some background research on shopping for the best and suitable mortgage plan based on individual needs. While flashy discounts may be flattering and catchy, without proper knowledge, a home buyer may end up getting caught in hidden expenses, that they failed to understand during the application of a mortgage loan.