Compare Mortgage Rates icon

Compare Mortgage Rates

Find Mortgage Lenders icon

Find Mortgage Lenders

Choosing a Home Loan that is the Best Fit for You

There are many different types of loans offered by a variety of lenders. It’s important to know that both the type of loan and the loan provider can affect your interest rate as well as the amount of your payment and closing costs.
A conventional loan may be available if you have a down payment equal to at least 3% of the loan amount. These types of loans are known as conforming loans because they meet, or conform to, the requirements of government sponsored entities (GSE) that guarantee these loans. These GSEs include Fannie Mae (FNMA) and Freddie Mac (FHLMC). Jumbo loans, which are loans in an amount greater than those accepted by the GSEs, are funded by private lenders.

The GSEs do not directly lend you money for your mortgage. Instead, they work with approved lenders that actually provide the money. The GSEs create what is known as a secondary market for mortgage loans. They do this by purchasing mortgages made by the lenders and then packaging them into securities that are sold on the investment market. When the GSEs purchase mortgages from the banks, they assume responsibility for the loan. The lender, in return, uses the money received from the GSEs to create more mortgage loans.

If you are considering borrowing a large amount of money in order to buy or refinance your home, you will probably need a jumbo loan. These loans exceed the funding limits set by Fannie Mae and Freddie Mac and are made by private lenders. As a result, jumbo loans typically carry a higher interest rate than conforming loans.

The U.S. government, in addition to state and local government agencies as well as private entities, has created various home loan programs designed to help you buy your home with a low down payment. First-time homebuyers, and buyers who earn a low to moderate income, may be eligible to participate in a special program insured by the Department of Housing and Urban Development (HUD), and administered through the Federal Housing Administration (FHA).

The FHA does not actually provide the money, nor does it purchase mortgages like GSEs do. Instead, the agency insures FHA loans. This insurance guarantees the lender that it will be reimbursed for its losses should the borrower default on the mortgage. Some borrowers may be eligible for an FHA loan with a down payment as low as 3%. Although there are limits to the size of FHA loans, those limits are generally higher than what is required to purchase the average moderately priced homes in most areas of the U.S.
Military veterans, and certain other people who qualify for military-related benefits, have an added advantage of being able to combine both the insurance offered by the FHA with an additional guarantee from the Veteran's Administration. These VA mortgages, as they are called, are designed to help veterans participate in the American dream of home ownership. Depending upon the circumstances, VA loans are available with little or no down payment while offering benefits similar to FHA loans.

Borrowers with bad credit usually will not qualify for a conventional loan. Subprime loans may be the answer in this case. These loans take into consideration the loan amount and loan terms, as well as the loan-to-value ratio. Your credit will be examined and assigned a grade in order to help select the best loan product for you. Borrowers who have less than perfect credit typically pay a higher interest rate because of the risk the lender assumes when making the loan.