Whether you’re a seasoned homebuyer or taking your first steps toward purchasing a home, a mortgage likely is in your future. Shopping for a mortgage can seem like a daunting task, but it doesn’t have to be.  A bank, credit union, mortgage company, or mortgage broker can offer a variety of mortgage programs to accommodate your goals and finances. Here is a quick guide to the types of mortgages available in Alabama.

A conventional mortgage is simply a home loan that is not guaranteed by a federal government agency like the Veterans Administration (VA) or Federal Housing Administration (FHA).  A conventional mortgage usually requires at least a 3 percent down payment, a higher credit score (at least 620), and a lower debt-to-income ratio (45-50 percent) which attracts buyers with no financial issues and those looking to purchase property that will not be their primary residence. These mortgages often are resold to investors which service the loan.

Conventional mortgages can either be conforming or non-conforming. Two government created agencies, Fannie Mae and Freddie Mac, set strict rules and guidelines for conforming mortgages that includes a maximum loan limit that may change each year and varies by location. For 2023, the limit is $726,200 for a single-family home in most areas. Non-conforming loans are not resold and held by the lender.

Interest rates on conventional mortgages may be fixed or adjustable rates.  Adjustable-rate mortgages (ARMs) typically have a lower initial interest rate which will increase over time – usually after an introductory period.  The lower initial interest rate can be an attractive option for a buyer who can sell the home or refinance the mortgage before the introductory period ends.  Fixed-rate mortgages will have a set interest rate for the life of the loan.  Buyers who prefer stability in their budget benefit from fixed-rate loans. The length of a fixed rate loan has an impact on the interest rate. Shorter term loans have a lower interest rate but higher payments that built equity faster. Longer term loans have a higher interest rate but lower payments because of the longer payoff term – usually 30 years.

If you qualify, government backed mortgages through FHA, VA or the United States Department of Agriculture (USDA), can make buying a home easier by allowing lower credit scores, higher debt-to-income ratios, and lower or no down payment requirements.  These loans are restricted to homes purchased as a primary residence and are not available for investment properties, second homes, and vacation homes.  There also may be limits on the loan amount.

Loans insured by the Federal Housing Administration and provided by a private lender require a lower credit score (500) than conventional loans making qualifying easier.   Because they have lower credit requirements, you must pay a slightly higher down payment (3.5 percent) than conventional loans.  FHA loans are capped based on whether the property is in a low-cost or high-cost area and whether the purchase is a single-family or multi-family home.  The maximum 2023 loan amount for a single-family home in Alabama is $472,030.

The main qualification for a loan backed by the U.S. Department of Veterans Affairs is military service.  As a benefit to active-duty military and honorably discharged veterans (including National Guard and reservists), VA loans made by private lenders will cover 100 percent of the cost of a primary residence with no limit and no private mortgage insurance requirement.  To qualify, active-duty military and veterans must meet length of service requirements (90 days in wartime and 181 days in peacetime for regular military).  For a full explanation of VA housing benefits and eligibility click here.

The VA has no minimum credit score requirement or debt-to-income ratio ceiling.  However, lenders are encouraged to review credit information to ensure an applicant is credit worthy.

If the rural life is calling, a loan guaranteed by the United States Department of Agriculture (USDA) may be your ticket to paradise.  There’s one catch:  the home or land must be in a designated rural area – and much of Alabama is designed rural – and used as a primary residence.  As with VA loans, USDA will finance 100 percent of the purchase price with no down payment and there is no set minimum credit score.  However, private mortgage insurance is required.  The program also is subject to income limits based on the number of people living in the home.  More information on eligibility can be found here.

Once you’ve found the home of your dreams, shopping for a mortgage shouldn’t be a nightmare.  Knowing your options before you buy will keep you from losing sleep during the process of financing.