Selecting the right type of mortgage loan may seem like a daunting task, but once you know the differences (and advantages) of the different types in the market, it’s not that difficult.
Today, we’re going to discuss five types of mortgage loans for homebuyers to help you come to a more informed decision when choosing the best type of mortgage loan.
1. Conventional Loan
A conventional mortgage is a type of mortgage loan that’s usually not backed (insured) by the federal government. Two types of conventional loans are conforming and non-conforming loans.
If the loan amount is within what’s set by the Federal Housing Finance Agency (FHFA), then they’re called conforming loans. If they fall beyond the limits set by the said agency, then they’re called non-conforming loans. Jumbo loans, or those loans that are way beyond the limits set by the FHFA, are the most common type of non-conforming loan.
Conventional loans can be used either for a primary home, second home, or investment property. Cost-wise, conventional loans tend to be lower than other types of mortgages, even if interest rates are slightly higher.
If you’re a homebuyer with strong credit, a stable income, and an employment history, and can put down a down payment of at least 3%, then conventional loans might be a great choice for you.
2. Jumbo Loan
Jumbo mortgages, as we have previewed in the first option, are conventional types of mortgages that have non-conforming loan limits. Jumbo loans allow a homebuyer to purchase a property way beyond the limits set by the FHFA.
Jumbo loans are more common in higher-cost areas and since loan providers allow you to purchase more expensive properties, they generally require more in-depth documentation to qualify.
Despite the added risk, that is, allowing a buyer access to larger loan grants, interest rates still tend to be competitive with other conventional loans.
As far as requirements are concerned, you need to put a down payment of at least 10- 20%rcent needed. Sometimes you also have to present a FICO score of 700 or higher typically required (although some lenders accept a minimum score of 660)
Since you’re “fighting above your weight class”, you must also have significant assets (generally 10 percent of the loan amount) in cash or savings accounts.
Jumbo loans are for borrowers who have good to excellent credit, a high income, and can put a substantial down payment. These are ideal for more affluent buyers purchasing a high-end home. Surprisingly, many reputable lenders offer jumbo loans at competitive rates.
3. Government-Insured Loans
The U.S. government isn’t an official mortgage lender per se, but it does sometimes, help more Americans become homeowners. The Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans), and the U.S. Department of Veterans Affairs (VA loans) are three government agencies that back mortgages.
FHA loans – If your FICO score is greater than or equal to 580, then you have the chance to get the FHA maximum of 96.5% financing (requiring only a 3.5% down payment). If you have a score of 500 – don’t despair; that is acceptable, but you will be required to put at least a 10% down payment.
FHA loans require two mortgage insurance premiums – one is paid upfront, and the other is paid annually for the life of the loan if you put less than 10% down, which can increase the overall cost of your mortgage.
FHA loans are ideal for borrowers who don’t have a large down payment saved up or don’t have pristine credit.
USDA loans – USDA loans help low to middle-income borrowers to buy homes situated in rural areas. The property must be in a USDA-eligible area and meet certain income limits to qualify. Some USDA loans do not require a down payment for eligible borrowers with low incomes.
VA loans – VA loans provide low-interest mortgages for members of the U.S. military (active duty and veterans) and their families. VA loans do not require a down payment or mortgage insurance, and closing costs are generally capped and may be paid by the seller.
If you’re connected with the military, either on active duty or as a veteran, VA loans are a practical choice. The credit requirements are more relaxed and a large down payment will not be required. Furthermore, it is available not just to first-time buyers, but also to repeat buyers.
4. Fixed-Rate Mortgage
Fixed-rate mortgages let you keep the same interest rate until your loan is paid off, which means you have a clear picture of how much your payments will be as they stay the same throughout. You choose to get fixed loans in terms of 15 years, 20 years, or 30 years.
The monthly principal and interest payments stay the same throughout the life of the loan, which gives you a sense of consistency and makes it easier to plan your finances. The longer terms usually mean you need to pay more in interest. In addition, interest rates are usually higher than rates on adjustable-rate mortgages (ARMs)
Nevertheless, if you’re planning to pay off your property within 7-10 years then, a fixed-rate mortgage offers predictability with your monthly payments.
5. Adjustable-Rate Mortgage
Adjustable-rate mortgages (ARMs) have fluctuating interest rates that can go up or down with market conditions. Many ARM products have a fixed interest rate for a few years before the variable interest rate kicks in for the remainder of the term.
Look for an ARM that caps how much your interest rate or monthly mortgage rate can increase, so you don’t wind up in financial trouble when the loan resets. During the first few years of the loan, you can expect a lower fixed rate. Also, if the market conditions become better after the fixed-rate period, then it would be to your advantage.
Before moving forward with any mortgage, carefully consider your financial situation. Review your circumstances and needs, and do your research so you know which types of mortgage loans are most likely to help you reach your goals.
If you are ready to buy a home, it is time to let the team at Total Lending Concepts lend you a hand.