When looking for the right mortgage, the most important question to answer is, “Which mortgage type is right for my financial situation?” This means a few things:

• The type of loan you can qualify for with your current credit score and debt.
• The amount of monthly payment you can afford.
• The amount of the down payment.
• And length of time you plan to own the house.

Your monthly mortgage payment is determined by several of these factors. To learn more about how your mortgage payment is calculated, see our post about what costs are included in a mortgage payment.

Fixed Rate versus Adjustable Rate

The two basic types of mortgages are fixed rate loans and adjustable rate mortgages (ARMs). A fixed rate means the percent of interest charged to the loan remains the same throughout the entire mortgage term, regardless of fluctuating rates in the market. An adjustable rate loan usually begins with a fixed rate for a certain period of time, say five years, but then can be adjusted at regular intervals as the market changes. This means the interest rate on the loan can be raised or lowered throughout the mortgage term. However, with historically low rates such as we have now, there is little reason to consider an ARM.

Both of these types of loans can have different term lengths, such as 10, 15, 20 and 30 years. Generally, if you have a longer term of payment (such as a 30 year term), the amount of your payment that goes to principle each month will be low. And if you have a shorter term of payment (such as 15 years), your intial principle payments will be higher.

FHA and VA Loans

You also need to see if you qualify for certain types of loans that offer lower down payments, such as FHA and VA loans. An FHA loan is a loan backed by the Federal Housing Administration and used by the FHA to promote home ownership. It may be easier to qualify for an FHA loan, but you do need to have a reasonable debt to income ratio (better than 29/41)  FHA has a maximum loan amount in Arkansas around $270,000.  With an FHA loan, the FHA guarantees the lender won’t have to write off a loan if the borrower defaults, since the FHA will cover it. This also allows the borrower to pay less on the down payment. An FHA loan is great for first-time home buyers and borrowers with lower credit scores and requires a minimum of a 3.5% down payment.

If you are a veteran or military personnel, then you may qualify for a VA loan. Congress signed in the VA Loan Guarantee Program in 1944 in order to help returning military obtain a home easier. The Department of Veteran Affairs will back up the VA loan in the event the borrower defaults and allow the borrower to purchase with no money down and not worry about paying a Private Mortgage Insurance fee.  Qualified veterans are also more likely to get more competitive rates and terms from their lender as well.

So be sure to ask your lender exactly what kind of loan programs you possibly qualify for before making a decision, because there might be opportunities out there you don’t know about.

Rural Development Loans

Rural Development (RD) loans are loan options for individuals purchasing a home in a designated “rural” area.  RD loans allow for no down payment, but do have an additional monthly program payment similar to mortgage insurance.  This program is administered by the U.S. Department of Agriculture, which backs these loans similarly to the FHA and VA programs.  RD loans have an income qualifier, i.e. depending on the size of your household, there are income limits (you can’t make too much money) as well as geographic restrictions.

Arkansas Development Finance Authority (ADFA) Bond loans

The ADFA has a loan program in which ADFA bonds have been issued to provide mortgage financing for low to moderate-income borrowers.  This program is limited to first time borrowers.  The Bond program is a hybrid that takes an FHA, VA or RD backed loan and provides additional financing options that allow for the possibility of down payment assistance.  This program is also income restrictive (you can’t make too much money) and the amount or availability of down payment assistance is income based as well.

Get Prequalified for a Home Loan Online

Once you have decided on the type of mortgage you think will best fit your lifestyle, get prequalified for a mortgage online. Most mortgage companies offer online applications that take less than 20 minutes to complete. It is a process that requires financial information such as bank account numbers, a credit check and your complete financial history. If you wish to get prequalified over the phone or in person, contact a lender and he or she will be happy to work with you.

Talk to your lender about your options, conduct online research, and ask others about their home buying experiences. The more you understand about your situation and your choices, the better decision you’ll make about choosing the right mortgage.