Every situation is unique. Just because one type of mortgage was good for your neighbor or even your parents doesn’t mean it’s the right mortgage for you.

Every borrower has a different set of needs when finding the right mortgage.

How Do You Choose The Best Mortgage?

• Determine how long you’ll own the home
• Decide how much income you want to allocate to a mortgage
• Match your situation to the right loan program

These are simple yet effective in helping you decide what mortgage is right for you.

Types Of Mortgages

There are two main groupings of mortgages: conventional mortgages and government-backed mortgages. 

Conventional Mortgage

Under a Conventional mortgage, which the federal government does not back, you have conforming and non-conforming loans (aka jumbo mortgages).

Investopedia has a great explanation of what a Conforming loan and a non-conforming loan are:

What Is a Conforming Loan?

A conforming loan is a mortgage that is equal to or less than the dollar amount established by the limit set by the Federal Housing Finance Agency (FHFA) and meets the funding criteria of Freddie Mac and Fannie Mae. For borrowers with excellent credit, conforming loans are advantageous due to the low-interest rates affixed to them.

source: investopedia

What Is a Nonconforming Mortgage?

A nonconforming mortgage is a mortgage that does not meet the guidelines of government-sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac and, therefore, cannot be sold to them. GSE guidelines consist of a maximum loan amount, suitable properties, down payment requirements, and credit requirements, among other factors.

source: investopedia

Most mortgages issued are Conventional mortgages, and most Conventional mortgages fall under the Conforming loan limits.

Government Backed

Under a government-backed mortgage, you have FHA, VA, and USDA mortgages. Out of the three, the FHA mortgage program is the most popular. FHA stands for Federal Housing Administration.

The second most popular Government-backed mortgage program is the VA, which stands for Veterans Administration.

The USDA mortgage is the third most popular program. USDA stands for United States Department of Agriculture.

FHA Mortgages

Bankrate.com has a good definition of what an FHA mortgage is.

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration, or FHA for short. Popular with first-time homebuyers, FHA home loans require lower minimum credit scores and down payments than many conventional loans. Although the government insures the loans, they are actually offered by FHA-approved mortgage lenders.

FHA loans come in 15- and 30-year terms with fixed interest rates.

source: bankrate

VA Mortgage

According to Veterans United Home Loans, this is what a VA loan is;

The VA loan is a $0 down mortgage option available to Veterans, Service Members and select military spouses. VA loans are issued by private lenders, such as a mortgage company or bank, and guaranteed by the U.S. Department of Veterans Affairs (VA).

source: veterans united home loans

USDA Mortgage

The writers over at NerdWallet have a good explanation of what a USDA mortgage is;

A USDA home loan is a zero down payment mortgage for eligible rural homebuyers. USDA loans are issued through the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, by the United States Department of Agriculture.

source: nerdwallet

As you can see, each mortgage helps a different group of borrowers. Knowing which mortgage does what will help you decide, “What mortgage is right for me?”

Fixed-Rate VS. Adjustable-Rate

There are two types of loan structures under the above types of mortgages: fixed-rate mortgages and adjustable-rate mortgages (aka ARMs).

What is a fixed-rate mortgage?

A fixed-rate mortgage means that your interest rate, monthly principal, and interest payment will never change. There are five fixed-rate mortgage options;

• 30-year fixed
• 25-year fixed
• 20-year fixed
• 15-year fixed
• 10-year fixed

Most government-backed loans (FHA, VA, and USDA) are fixed-rate mortgages.

What is an adjustable-rate mortgage?

An adjustable-rate mortgage means that your interest rate will eventually adjust, as will your payment. Usually, you have a fixed period of 5, 7, or 10 years, and then after the fixed period, the rate and payment will adjust.

Determine How Long You’ll Own The Home

If you say that this will be the last home you’ll ever buy and you never want to do another mortgage again, then you should focus on a fixed-rate mortgage.

If you plan on selling or refinancing within two to three years, you might want to consider an adjustable-rate mortgage. 

Another reason to consider an adjustable-rate mortgage is that if the rate is significantly lower than a fixed-rate option, it might be something to consider even if you plan on having the mortgage for a long time. A word of caution: make sure you fully understand all the ins and outs of the adjustable-rate mortgage you are considering. 

Decide On How Much Income You Want To Allocate To A Mortgage

The mortgage industry does have limits on how much of your income can be allocated to your total mortgage payment; however, we suggest a more conservative approach.

For those that will not be seeing significant increases in income over the next 5-10 years, we suggest a Debt-To-Income (DTI) ratio of 35%-40%. If your income is expected to grow significantly over the next 5-10 years, then we suggest a DTI of 40%-45%.

Can you get an approval at higher DTI levels?

Absolutely but that doesn’t mean you should “max out” your mortgage payment. You can sometimes go as high as a 50% DTI, but that doesn’t leave much left over for other expenses.

And when mortgage lenders figure out DTI, they calculate all your debt (monthly payments) and your total house payment. Your total house payment is your mortgage, property insurance (broken into 12 payments), property insurance (broken into 12 payments), and if you have one, your monthly HOA fee. 

Even if you are not adding your property taxes and insurance to your monthly payment, an underwriter will still calculate your DTI this way.*

Match Your Situation To The Right Mortgage Program

Choosing between a USDA, VA, FHA, or Conventional loan is not as difficult as you might think. 

USDA Mortgage Program

Only homeowners who live in rural, agricultural areas should consider a USDA mortgage. If you don’t, cross this one off the list.

VA Mortgage Program

The only homeowners who can access the VA mortgage program on those that are in the military or have previously served in the military. If that doesn’t apply to you, then you can cross this program off the list.

FHA Mortgage Program

If you have one, some, or all of the following, you may want to consider an FHA mortgage. 

• less than perfect credit
• lower-moderate income
• a low down payment

If you currently have an FHA mortgage, you should consider the FHA Streamline refinance loan program, one of the best refinance programs in the mortgage industry.

Conventional Mortgage

Remember that there are two types of conventional mortgages: conforming and non-conforming. If your loan amount is at or below the conforming loan limit for your county, you should consider a conforming loan. 

If your loan amount is about the conforming loan limit, you should consider a non-conforming loan (aka a jumbo home loan).

Additional Considerations For Homebuyers And Homeowners

Here are some additional considerations for both homebuyers and homeowners.

Homebuyers And Homeowners

• Do you have a conforming loan amount or a jumbo loan amount?
• Is the property a Single-Family-Residence, a Townhome, a Condominium, or a Multi-Unit property?
• How is your credit, and should you consider improving it before moving forward with a new mortgage?
• Should you impound your property taxes and insurance?

Specific To Homeowners Refinancing Their Mortgage

• If you’re taking cash out, what’s it for, and how much do you need?
• Are you truly receiving a net benefit from the refinance?
• What was the total amount of fees you paid with your last mortgage transaction?
• Do you qualify for a Property Inspection Waiver (no appraisal)?

Some people find it helpful to make a “pros” and “cons” list when it comes to making the decision on what mortgage is right for them.

It’s a good way to see each loan and how the different programs may impact you positively and/or negatively. It’s also important to work closely with your loan officer as he or she will be able to provide additional insight as to which mortgage is right for you.