Mortgage basics

Loan types at a glance

The table below compares the main options. It isn't a list of rates or limits, because those change. Use the links to check current terms, and have a lender compare two or three options side by side for your situation.

A closer look at each

Conventional loans

These loans follow Fannie Mae or Freddie Mac guidelines. With 20% down there's no mortgage insurance. With less, you pay PMI, which can generally be canceled once you build enough equity. Fannie Mae's HomeReady and Freddie Mac's Home Possible allow as little as 3% down for buyers at or below 80% of area median income. You don't have to be a first-time buyer, but a homeownership course may be required. Freddie Mac has an income eligibility tool you can check by address.

FHA loans

FHA loans are insured by HUD. HUD describes its standard 203(b) program as offering roughly 96.5% financing (HUD 203(b)). FHA charges both an upfront and an annual mortgage insurance premium, and FHA loans have county loan limits (look up Barnstable County limits). One thing to know on the Cape: FHA appraisals also check certain property conditions, so a home with peeling paint, a failed septic system, or other health and safety issues may need repairs before closing.

VA loans

If you've served, start here. VA loans are often the strongest option for eligible buyers. We have a full VA loan guide covering entitlement, the funding fee, and how VA loans compete in multiple-offer situations.

USDA loans

USDA Rural Development guarantees loans (and makes some direct loans) in areas it designates as eligible, for buyers under its income limits. A lot of Barnstable County falls within USDA's eligible areas, but some denser areas don't, and the boundaries are set by USDA. Check the specific address on USDA's property eligibility map (linked from the USDA program page) and have a USDA-approved lender confirm it. Don't assume a town is in or out.

MassHousing

MassHousing is the state's affordable housing bank. Its mortgage loans are fixed-rate and offered through approved local lenders. Homebuyer education is required. Its MI Plus mortgage insurance includes job-loss payment protection on MassHousing-insured loans. The main reason first-time buyers use MassHousing is to pair the loan with its down payment assistance (see Lesson 4). Check eligibility with MassHousing's quick check.

MHP ONE Mortgage

Massachusetts Housing Partnership's ONE Mortgage is a fixed-rate loan for first-time buyers. MHP defines that as not having owned a home in the past three years. The program currently lists 3% down for condos, single-family, and two-family homes, no PMI, income limits by community, a household asset cap, and a required homebuyer class. Check MHP for current income limits.

Pre-approval: what it is and isn't

A pre-qualification is a quick estimate based on what you tell the lender. A pre-approval means the lender has pulled your credit and reviewed your income, asset, and debt documents. On the Cape, listing agents generally expect a pre-approval letter with any offer, and in competitive situations they may call your loan officer.

• Typical documents: pay stubs, W-2s or tax returns, bank statements, ID, and explanations for any large deposits.
• Have your lender tailor each letter to the offer price. Don't show the seller your maximum.
• Tell your lender if you're considering a condo. Condo projects have their own approval rules, and some loan programs can't be used in some complexes.
• Tell your lender about any homes in a flood zone or on a private well, so required insurance and testing are built in from the start.

Rate locks and points

A rate lock holds your interest rate for a set period, often 30 to 60 days, as long as you close in time and your application doesn't change. The CFPB notes that extensions can be expensive, and that a change to your loan amount, credit, income, down payment, or appraisal can still change your rate (CFPB on rate locks). Line up your lock with the mortgage commitment and closing dates in your Purchase and Sale Agreement.

Discount points are fees paid at closing to lower your rate. One point equals 1% of the loan amount. Lender credits work the other way: you accept a higher rate in exchange for help with closing costs. Points make more sense if you'll keep the loan a long time. Credits help when cash is tight (CFPB on points and credits). To compare, divide the cost of the points by the monthly savings. That tells you how many months it takes to break even.

Mortgage insurance (PMI and MIP)

Mortgage insurance protects the lender if you default. It's what makes low-down-payment loans possible.

• Conventional PMI: the cost depends on your credit and down payment. It can generally be removed once you reach enough equity.
• FHA MIP: an upfront premium (usually financed into the loan) plus an annual premium. How long you pay it depends on the loan terms.
• VA: no monthly mortgage insurance, but most borrowers pay a one-time funding fee (see VA guide).
• ONE Mortgage: no PMI, which is one of its biggest advantages.

Choosing a lender

Not every lender offers MassHousing, ONE Mortgage, USDA, or VA loans. Ask directly. Compare Loan Estimates from two or three lenders on the same day, for the same loan amount and lock period. Local lenders who know Cape appraisers, condo complexes, and Title 5 timing can make closing go more smoothly. Find approved lenders through MassHousing's lender list and MHP's ONE Mortgage site.

Lesson checklist

• I've asked a lender which programs I qualify for: conventional, FHA, VA, USDA, MassHousing, ONE Mortgage.
• If I'm a veteran, I've read the VA loan guide.
• I've gathered my pre-approval documents.
• I understand rate locks, points, and lender credits.
• I plan to compare at least two Loan Estimates.