Part of the home buying process is finding the right mortgage. It’s not as fun as buying a house, but it’s the only way to get the necessary financing.

Knowing how to find the right mortgage helps alleviate the stress it causes. An educated borrower gets the best deals and the best loan terms.

You have several options when looking for a mortgage, in this guide we’ll show you the simple steps to choosing the right loan.

southern maryland mortgage options

What’s your Financial Situation?

First, look at yourself. Lenders will evaluate your financial wellbeing. Where do you stack up?

Look at the following:

  • What’s your credit score?

This is the first thing lenders look at, so fix your credit as soon as you can. If you have a 680 or higher credit score, you may qualify for all loan programs, including conventional. Anything lower and you may have to take a government-backed loan, which isn’t a bad deal either – they have some great terms and low rates.

If you don’t know your credit score, check with your credit card companies or bank. Most offer free access to your credit score. Pull your free credit history from each of the three bureaus here too. Your history will tell you more about what you need to fix/change to improve your credit score.

  • Is your income stable?

Lenders look for 2 years of stable income. If you changed jobs, it won’t count against you unless you have a large employment gap or if you changed industries recently. Lenders like stability and reliability.

  • Do you have a lot of debts?

You’re about to enter into a loan that lasts for the next 15 – 30 years. If you already have a ton of debt, lenders may not be excited about adding to it. Pay your debts off before you apply for the mortgage and you’ll get better terms. Lenders calculate your debt-to-income ratio(DTI) or the comparison of your monthly debts to your income before taxes. The lower the DTI is, the better your chances of approval.

  • Do you have a down payment?

Most loans require some type of down payment. The more money you have saved, the better loan terms you’ll get. You don’t need a huge down payment, but having at least 3 – 5% to put down gives you more loan options.

Know your Options

Once you’ve determined your qualifying factors, see how you measure up with the available programs.

Conventional Loans

This is your ‘traditional loan.’ It has the toughest qualifying requirements, but often has the lowest rates and the best terms:

  • 660+ credit score
  • 3% down payment for first-time homebuyers or 5% for subsequent homebuyers
  • 36% total debt-to-income ratio
  • Stable income and employment for 2 years
  • No recent bankruptcies or foreclosures
  • No recent collections
  • You must pay Private mortgage insurance (PMI) if you put less than 20% down

FHA Loans

FHA loans are a government-backed loan. They have more flexible guidelines because the FHA guarantees lenders if you default that they will pay them back. FHA loans require:

  • 580+ credit score (for 3.5% down payment)
  • 500 – 579 credit score with a 10% down payment
  • 43% total debt-to-income ratio
  • Stable income and employment for the last 2 years
  • No recent bankruptcies or foreclosures
  • No recent collections
  • Proof that you’ll occupy the property as your primary residence
  • All borrowers pay 1.75% upfront mortgage insurance at the closing

USDA Loans

USDA loans are for low to moderate income families living in a ‘rural’ area. The USDA has a loose definition of ‘rural,’ so most areas outside of the metropolitan areas qualify. USDA loans require:

  • 640+ credit score
  • No down payment
  • 41% total debt-to-income ratio
  • Stable income and employment
  • No recent bankruptcies or foreclosures
  • No recent collections
  • Proof that you’ll occupy the property as your primary residence
  • Proof that you can’t secure any other type of financing
  • All borrowers pay 1.0% of the loan amount for upfront mortgage insurance at the closing

Both FHA and USDA loans charge annual mortgage insurance for the life of the loan. The FHA charges 0.85% of the loan amount and the USDA charges 0.35% of the loan amount. Lenders break it up into 12 monthly payments to make it more affordable.

VA Loans

VA loans are for veterans and current military members. If you served at least 90 days during wartime or 181 days during peacetime, you may be eligible. Those that served in the Reserves or National Guard for 6 years may also be eligible. The VA requires:

  • 620+ credit score
  • No down payment
  • Stable income and employment
  • Proof of eligibility (enough service and an honorable discharge)
  • No recent bankruptcies or foreclosures
  • No recent collections
  • Proof that you’ll occupy the property as your primary residence
  • You must pay the 2.3% upfront funding fee

The VA doesn’t charge mortgage insurance on any loans.

Shop Around for Rates

Once you know the mortgage program that’s right for you, it’s time to shop for the best rates and terms.

Each lender has regulations and guidelines. Some lenders are more lenient than others and some lenders charge more than others.

I recommend securing at least 3 quotes from lenders so you can compare your options. This gives you a good baseline of what to expect and you can tell which lenders are more affordable than others.

Bottom Line

Take your time finding the right mortgage lender. You’ll have the mortgage for the next 15 to 30 years, so it’s important that you find the one that works best for you. You want the mortgage that is most affordable, yet provides the right terms. Look at the big picture when shopping for a lender.

Look at their customer service, rates, closing fees, requirements, and what the loan will cost in the long run. Your mortgage is a large part of the home buying process, so make sure you choose a lender that provides what you need.

Billy Rabbitt offers buyer and seller services for the Southern Maryland real estate market.


Billy Rabbitt

Billy Rabbitt of the Rabbitt Real Estate Team offers real estate services for buyers, sellers and investors throughout Southern Maryland.

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