How to Find the Best Home Loan for Your Situation

By Brandon Cornett
© 2011 All rights reserved

"How can I find the best home loan for me, given my financial situation?" This is one of the more common questions we get from readers, especially those who are buying their first home. So we thought it was time to dedicate an entire article to the subject.

In this lesson, we will discuss some of the strategies you can use to find the best home loan for your particular situation. The lesson is divided into the following subtopics:

• The affordability factor
• Types of home loans
• Types of lenders

Let's get started by talking about one of the most importance concepts of all -- affordability.

The Best Home Loan is the One You Can Afford

Many first-time buyers skip over the budgeting process when buying a home. They just assume the mortgage lender is going to help them establish a housing budget. This is a huge mistake, and it drives a lot of people into foreclosure.

Here is one of the most important concepts to take away from this article. In order to find a home loan that best suits your needs, you need to start with your budget. You must review your financial situation and determine how much you can afford to spend on a mortgage payment each month. Here's how to go about it.

First, take a look at how much money you're spending each month. Don't just ballpark it -- put it down on paper, and add it up properly. This should include your car payment, insurance premiums, groceries, savings contributions, leisure activities, and whatever else you're paying for each month. If you're currently renting an apartment, you can leave the item off the list (it will disappear when you buy a home).

Next, you need to consider how much money you make each month, after taxes. Subtract your monthly expenses from your net monthly income, and you'll have a pretty good idea how much of a mortgage payment you can take on. If the monthly payments on a home loan were to exceed this number, then you could run into problems.

Remember, in order to find the best home loan for your situation, you need to start with affordability. Don't rely on a lender to help you with this. It's not their job to figure this out -- it's yours. Find out how much you can comfortably afford to pay each month, and stick to that limit.

Types of Home Loans

We covered affordability in the previous section. That's the first step to finding the best mortgage loan for your needs. Once you have a firm budget on paper, you should start researching the different types of home loans. Here are two important decisions to consider:

Conventional mortgage vs. government-insured. FHA and VA loans are two examples of government-backed mortgages. The qualification process is typically easier with a government-insured loan, and the down payment is usually smaller as well.  A conventional, or "regular," mortgage is one that is not backed by the federal government. There are pros and cons to each financing strategy. In order to find the best home loan for your needs, you must first understand these pros and cons. You can learn more about FHA loans in this fact sheet.

Fixed-rate vs. adjustable mortgage (ARM). You must also decide between a fixed and adjustable-rate mortgage loan. Here are the key differences between them. These days, most home loans are either fixed or "hybrid" loans. Hybrid means that it starts off with a fixed rate of interest, and then it begins to adjust after that. To find the best mortgage option, you need to understand the differences between them. If you're planning to stay in the home for a long time (i.e., more than a few years), we recommend choosing a fixed-rate loan.

Types of Mortgage Lenders

Some first-time buyers think they are limited to the "big banks" when shopping for a home loan. Nothing could be further from the truth. You can certainly apply with Wells Fargo, Citi, and the other major lenders. But you should also look at your local banks and credit unions. To find the best home loan, you must consider all of your options.

If you have an existing relationship with a credit union or bank, ask them about their current mortgage offers. You may find they are willing to offer better terms than one of the big banks, since you're already a customer.

Conclusion and Summary

Let's recap some of the key points discussed in this article. In order to find the best home loan for your situation, you should start by creating a budget. You need to know how much money you can comfortably afford to pay each month. Do this before you start talking to lenders.

You also need to understand the pros and cons of the various mortgage options. This means researching FHA loans, traditional mortgages, and fixed vs. adjustable-rate loans.

Lastly, you should consider different types of lenders when shopping for a loan. Talk to the loan officers at your local bank or credit union. See what they're willing to offer you.

You are here  >>  Mortgage Process  >>  Finding the best loan