Applying for a new mortgage in 2024? Here's what you must know first!

By: George Castro, P.A.

Obtaining a mortgage is possibly the biggest investment you can make in your life time. New and existing home buyers who are not familiar with the home buying process, when it comes to financing, can easily oversee the importance on the different factors that can affect the terms of your 30 year note. Not all mortgages are treated equally. You may have heard of an FHA or Conventional loan but, what is the difference between the two and which loan is best for you?

It is crucial to understand the different loan products that exists and that are offered through your lender. FHA loans, which was created to make housing more affordable, is a government insured loan which only requires a borrower to put a down payment as low as 3.5% This is good news for borrowers who are cash strapped for closing costs and, have lower credit scores. FHA (Federal Housing Administration) loans has helped millions of homeowners purchase their first home and, the loan program has helped the US economy by increasing the blood-life of the economy- housing!  

FHA requires a smaller deposit than a typical conventional loan, however a borrower must be familiar with what is known as mortgage insurance premium (MIP). When a borrower places a lower down payment such as 3.5%, the borrower is considered to be at a higher risk for default therefore, MIP is a percentage that is calculated as part of the monthly payments. FHA mortgages requires an MIP to be paid both upfront at closing and monthly within the mortgage. MIP is considered as an insurance to offset the risk of default by the borrower and can be paid for the life of the loan.

Although, you can save on the down payment, a MIP added to your loan can make your monthly payments a bit more expensive. Conventional financing is any other loan that is not an FHA loan. Lenders may have loan products that require low deposits however, a conventional loan typically requires a 5-25% down payment. Similar to a MIP, a conventional loan will require private mortgage insurance (PMI), if a borrower places a deposit on the loan less than 20% down. MIP and PMI do not protect the borrower. It only protects the banks in case the borrower defaults on their loan. 

You've heard it many times- interest rate! The interest rate will also affect your monthly payments based on its "locked-in" rate. With interest rates hitting an all time high at 7.79% in 2023, borrowers are understanding the importance of buying down a lower rate for an economical monthly mortgage payment. Although the difference of 6.5% to 7% may not add up to a significant dollar amount, during the life of a 30 year mortgage, that difference does add up. This is why keeping your credit score in a healthy range is crucial, before applying for a mortgage. FICO reported that in 2023, borrowers with a credit score of greater than 760, earned a mortgage rate at an average of only 6.06% however, borrowers that had a lower credit score averaged an interest rate of 7.65%       

Homeowners looking to sell in 2024 should be vigilant of the terms on different loans. Buyers who need financing to purchase, will certainly be presenting Sellers with pre-approvals (or D.U. approvals) with their loan terms at the time an offer is submitted for review. In a multiple offer scenario, certain loan terms may or may not qualify certain buyers as commendable candidates to be the winning bid.     

Disclaimer: This article is not to be construed as legal advice. Always be sure to consult with a real estate attorney.