If you’re a first-time homebuyer shopping for a conventional mortgage, don’t even bother looking unless you have at least some money saved.
You will need a 20 percent down payment plus closing costs to qualify for most conventional loans underwritten solely by banks and mortgage companies.
“It’s very hard to get conventional financing if all you can pay is 5 percent or 10 percent,” says Toni McIntyre, a Long & Foster real estate agent based in Reston.
There are options, however, for would-be homeowners who don’t have that 20 percent down. There are three government-backed mortgage programs from Fannie Mae, Freddie Mac and the Federal Housing Administration that permit down payments of 5 percent — with FHA offering loans to borrowers who have as little as 3.5 percent.
FHA will also be your best bet if you have blemished credit, McIntyre says.
If you’re a veteran or currently serving in the military, you may qualify for a mortgage even if you have no money for a down payment through a fourth program, the federally insured Veterans Affairs loans.
In the D.C. area, FHA and VA approve loans up to $729,000 for borrowers who qualify, while Fannie Mae and Freddie Mac limit the loan amounts to $625,500.
Mortgages for all government-backed programs are obtained from the same financial institutions that offer those conventional mortgages, including credit unions and banks. Each lender sets its own terms for rates, fees and points, so you’ll still need to shop around.
When evaluating loans, “borrowers tend to focus on monthly payments, but the annual percentage rate, which incorporates the interest rate as well as fees, is a better representation of the true cost of credit,” says Greg McBride, a senior financial analyst with Bankrate.com.
Borrowers should compare APRs for similar loans at a variety of financial institutions, from small community banks and credit unions to large national commercial and mortgage banks — any of which could offer the best deal on any given day.
The points, rates and fees for a loan tend to fluctuate in part because they reflect how willing a financial institution is to lend money.
“Sometimes, if banks are swamped with business, they will bump up their rates to push business away,” says Christopher Cruise, a loan officer with mortgage broker GOTeHomeLoans.
Other features besides cost may encourage borrowers to favor one lender over another; for example, ability to meet a short closing period.
Larger institutions used to have the edge there, but during the recent refinancing boom, those lenders were so overwhelmed they had difficulty meeting fast turnaround times.
“Some of the little guys had the advantage because they had their own loan-processing center and a smaller servicing portfolio,” says Tim Wilson, president of Long & Foster.
Though credit unions can’t always accommodate a fast closing, “they don’t have a lot of junk fees and their rates are very competitive,” McIntyre says.
Eligible borrowers should also consider specialty lenders such as the United Services Automobile Association, the financial institution that serves only military personnel. As with ordinary lenders, USAA offers competitive loans for all government-backed mortgage programs.
