Whether you’re a first-time buyer or you’ve done this before, purchasing a new home is always a complex process. Getting a mortgage can be particularly challenging given the costs, fees, and paperwork involved. The purpose of this website is to help you understand how to get a mortgage for your home purchase and compare the best mortgage lenders. We’ll tell you everything you need to know about home loans so you don’t have to go to the trouble of researching mortgage companies yourself.
The most common form of mortgage is a conventional mortgage, also known as a conforming loan. This type of home loan involves two parties: the borrower (you) and the lender. Most mortgage lenders require at least a 20% down payment on a conventional mortgage, e.g. if the home costs $300,000, the lender requires at least a $60,000 down payment and lends the remaining $240,000. The good news is that the best online mortgage lenders are increasingly offering low down payment conventional loans with as little as 3% down payment required.
Jumbo loans are loans that exceed the legal conforming loan limits set by the Federal Housing Finance Agency (FHFA). Because jumbo loans involve more money and therefore greater risk to mortgage companies, they typically have stricter qualifying requirements. In 2022, the conforming loan limit is $647,200 in most U.S. counties and as much as $970,800 in high-cost areas such as the greater New York, Washington, D.C., San Francisco, and Los Angeles areas. The best home mortgage lenders offer jumbo loans of up to $3 million to $5 million.
This is a government-backed loan offered by private mortgage companies to borrowers with poor credit or little money for a down payment. FHA loans come in two forms: 3.5% down payment for borrowers with credit of 580-619, or 10% down payment for borrowers with 500-579 credit. The catch with FHA loans is that it requires monthly private mortgage insurance (PMI), which you can usually stop paying once you reach 20% equity. Many, but not all, mortgage lenders offer FHA loans. The best online mortgage lenders typically only offer FHA loans to borrowers with a credit of 580+ but a handful serve borrowers with as little as 500 credit. Therefore, if you have poor credit, it pays to shop around for FHA loans.
VA loans are government-backed loans offered by mortgage lenders to service people and veterans. The minimum credit requirement for a VA loan is usually 620+, the same as a conventional loan, but the big prize here is the down payment requirement–or rather the lack of one. That’s right: VA loans don’t require any down payment, so you can take out a loan for the full value of the property. The following people may apply for a VA loan: veterans who have served at least 90 consecutive days of active service in wartime or 181 days of active service in peacetime; members of the National Guard and Reserve who have served at least 6 years; and spouses of veterans who died in the line of duty or as a consequence of a service-related injury.
Like other government-backed loans, mortgage companies may only offer USDA loans to borrowers who meet the qualifying requirements; in this case, the main requirement is purchasing in a rural or semi-rural area. USDA mortgages require no down payment but do require monthly PMI until you reach 20% equity.
Fixed-rate mortgages are the most common type of mortgage, especially among first-time home buyers. As the name suggests, fixed-rate mortgages are mortgages with fixed rates for the entire duration of the loan. When you take a fixed-rate mortgage, you pay more in year one than you would with an adjustable-rate mortgage. However, you protect yourself from the risk of a higher interest rate and higher monthly payments later in life. Given that interest rates are still hovering close to all-time lows in 2022, the only direction that rates can realistically go from here is upward–which is why locking in a fixed-rate mortgage is currently a better option than betting on an adjustable-rate.
Adjustable-rate mortgages, also known as ARMs or variable-rate mortgages, carry higher risk and higher reward than fixed rates. An ARM is always cheaper than a fixed-rate mortgage in year one, but it carries the risk of higher interest rates in the long term. ARMs have two components: the number of years the initial rate gets locked in for; and the intervals at which rates get updated. Most lenders offer ARMs of 3/1, 5/1, 7/1, or 10/1. A 3/1 ARM refers to an ARM with a fixed rate for the first three years and a rate update every year after that. The shorter your fixed period, the better your introductory rate (and the riskier the loan). Because of their unpredictable nature, ARMs are best for borrowers with a high-risk appetite or borrowers who plan on selling the home or paying off the mortgage early.
The best home loan lenders each set their own mortgage rates, which they update on a daily basis. Of course, all mortgage companies operate in the same market, so their rates tend to fall within roughly the same range at any given time.
Average online mortgage rates are currently* around:
*Updated Jan. 10, 2022
Whenever an online mortgage lender provides a mortgage loan to a borrower, they take on a certain amount of risk because there is never a 100% guarantee that the borrower will have the ability to pay back the entire loan. The best protection for the lender is the property itself, which the lender can seize or foreclose if the borrower defaults on payments. The other way online mortgage lenders protect themselves is by running a background check on the borrower.
When assessing a borrower, mortgage companies take into account things like credit score, income, expenses, and the size of the down payment. In order to run an assessment, your lender is likely to ask for the following:
The monthly payment on a mortgage comprises principal, as in the amount remaining on your loan, and interest, as in the money the lender collects for providing the loan. Your APR, or annual percentage rate, consists of the interest rate plus certain other lender fees. The lower the interest rate / APR, the lower your monthly payments to the lender.
The repayment term, or loan duration, is another important factor when comparing mortgages. The typical repayment term is 15-30 years although some online mortgage lenders offer mortgages with terms as short as eight years. There is no right or wrong when it comes to repayment terms; what’s best for you depends largely on how much you can afford to pay each month. The shorter the term, the higher your monthly payments but the less you’ll pay in interest over the life of the loan. The longer the term, the lower your monthly payments but the more you’ll pay your lender in the long run.
Closing costs are the fees and charges owed to the lender when the loan begins and usually range from 2-6% of the loan value. Therefore, if you take out a $300,000 loan and your closing costs are 3%, this means you’ll pay the lender $9,000 in upfront fees. Closing costs may include origination fees, property appraisal, title fees, taxes, and various other costs–some of which go directly to the lender and some which the lender collects on behalf of third parties. Closing costs vary from lender to lender, so knowing each lender’s approximate closing costs can assist you in doing a proper comparison.
Gone are the days when you had to walk into a physical branch to apply for a mortgage. These days, the best mortgage lenders let you apply online, sometimes through a fully automated online mortgage platform and other times with phone assistance from a loan agent. If convenience is important to you, then keep an eye out for digital-friendly lenders.
Customer service is always important, but even more so when we’re talking about six-figure deals. Always search for a lender that’s transparent about rates and fees, open about the requirements, and has good reviews. Be suspicious of lenders that hide or make it difficult to find important information.