You will come across multiple types of mortgage loans as you consider buying a home, whether you’re a first-time homebuyer or a practiced house flipper. Many different types of mortgage loans are available on the market today, and choosing the right one for you can be a daunting task. Understanding the six most common types of home loans and what options they offer is instrumental as you negotiate your way through this complex purchase. To help you make the best decision for your individual needs, let’s take a look at six of the most common types of mortgage loans.
Six Types of Mortgage Loans
Mortgages come in all shapes and sizes. While the 30-year fixed-rate mortgage might be the most traditional, it’s far from your only choice. Your lender will ask you about your income, credit, and the type of home you’d like to buy. Based on that information, they’ll recommend the types of loans that work best for you.
In this article, we’ll discuss the six most common types of mortgage loans on the market and go over a few other important details — like what loan term you need and whether a fixed or adjustable interest rate makes more sense for you. Let’s dive in.
If you have a decent credit score and a steady income, your bank will most likely check to see if you are eligible for a standard loan. A conventional loan is any mortgage provided by a private lender, such as a bank, that isn’t backed or insured by the government. Conforming loans are the most common type, whereas non-conforming loans are not.
The main distinction is the size of your mortgage. Conforming loans are intended to be sold to Fannie Mae and Freddie Mac, and the government has maximum amounts established for them — $510,000 in most counties (in 2020) — that must be paid back over 30 years. Additionally, other restrictions and criteria may apply, including a minimum credit score of 620, in most situations, and a minimum down payment of 3% for some qualified applicants.
Pros Of Conventional Loans
Conventional loans are perfect for individuals with excellent credit looking for the cheapest interest rates and a user-friendly application procedure. These mortgages are less expensive than most other kinds of home loans, such as FHA loans, as long as you qualify.
Cons Of Conventional Loans
If you have poor credit, you may be unable to qualify for a traditional loan. Also, keep in mind that if you put down less than 20%, you’ll almost certainly need to obtain private mortgage insurance, which will increase the overall cost of your loan.
If you’re concerned you may not qualify for a conventional loan, an FHA loan could be an option. FHA loans are mortgages issued by private lenders which are insured by the Federal Housing Administration. The government guarantee may help you qualify for a mortgage you may not have been able to get otherwise.
However, it’s important to know that not all applicants will be approved, and you might be required to make a 10% down payment with a credit score between 500 and 579. With credit scores of 580 or higher, you might be able to make a down payment as low as 3.5%.
Pros Of FHA Loans
The FHA is a government-sponsored mortgage program that provides low-interest loans to individuals who meet specific requirements. Because the federal government backs them, these loans have some significant advantages over conventional mortgages. If you qualify for an FHA loan, it might be easier than getting a regular mortgage since you don’t need a high credit score as with other lenders. They may also enable you to purchase a house with little down payment if applicable.
Cons Of FHA Loans
FHA loans are more expensive than home loans since the federal government’s guarantee costs pass on to you. The FHA requires each loan in its program to be insured by mortgage insurance. This is paid in two ways: a one-time charge at closing, known as an upfront payment, and a monthly insurance premium.
You may be eligible for a VA loan if you’re a veteran or serve in the military. If you meet specific requirements, you may be able to borrow money through the VA. These loans are insured by the United States Department of Veterans Affairs and help service members, veterans, and eligible family members purchase houses. You’ll borrow these mortgages from a private lender, with the federal government guaranteeing a portion of the debt.
Even with the government guarantee, you must meet your lender’s credit and income requirements to qualify for a VA loan. There is no minimum credit score requirement, but lenders will comprehensively investigate your finances to ensure you can repay your mortgage.
Pros Of VA Loans
They can be an excellent bargain if you qualify for a VA loan. You won’t have to put down any money in many situations. The VA also provides better terms and interest rates than other lenders, especially if your credit is terrible. Another advantage: VA financing doesn’t require mortgage insurance premiums.
Cons Of VA Loans
To obtain a VA loan, you must apply for a certificate of eligibility, which goes into your military service history. To be eligible, you must have served for a specific time, ranging from 90 days to two years, depending on when you joined the military.
If you’re buying a property in a rural location, you may qualify for a USDA loan. The United States Department of Agriculture (USDA) is the agency that administers several government-backed loans to assist low and middle-income individuals purchase homes in rural areas. These initiatives provide direct financial aid or backstop private lenders’ loans based on the eligibility criteria.
Also, the direct loan program may be a good fit if you don’t have adequate housing or can’t afford traditional loans. You must live in an area with fewer than 35,000 people to qualify. These fixed-rate loans don’t usually require a down payment and aren’t available everywhere. You’ll apply for these directly through your USDA Rural Development office.
Pros Of USDA Loans
As we mentioned, USDA loans are best for people with low and moderate incomes who live in rural areas.
Cons Of USDA Loans
You might not qualify. While there are no credit score minimums, you must prove that you can pay back the money. Your monthly home payment should not exceed 29% of your monthly income.
If you’re purchasing a high-priced property, you’ll almost certainly need to apply for a jumbo loan. A jumbo loan is a mortgage that exceeds the Freddie Mac and Fannie Mae conforming loan limits by $50,000 or more. A jumbo mortgage might be worth anywhere from $500,000 to $2 million.
Pros Of Jumbo Loans
Jumbo loans are ideal for individuals requiring a mortgage for a sum greater than the average home price in the United States.
Cons Of Jumbo Loans
To obtain a jumbo loan, you’ll generally need excellent credit and the ability to make a substantial down payment. Remember that jumbo loans have a higher interest rate than standard mortgages.
A reverse mortgage is a kind of home equity loan for people who are 62 and older and need money. It’s a form of home equity loan developed for seniors who wish to use the value of their property for additional retirement income. When you leave the house, you’ll usually owe the remaining amount, or your spouse or heirs will have to repay the lender if you die.
The amount you’ll be able to borrow in a reverse mortgage will depend on:
- How old you are.
- The value of your home.
- Market interest rates.
- Your ability to pay taxes and other household expenses.
Pros Of Reverse Mortgages
Reverse mortgages work best for those 62 or older who need funds to help pay for healthcare or other regular expenses.
Cons Of Reverse Mortgages
The amount you owe on a reverse mortgage increases as interest and costs are added to the principal. This means that you, your spouse, or heirs will have to sell the property to repay the loan if you move out of the house (or after you pass away).
Read More: Is Now a Good Time to Refinance Your Mortgage?
What Else Should I Think About Before I Take Out a Mortgage?
When looking for a mortgage, there are numerous things to think about. When considering your loan type, remember that other factors may come into play. Your loan term is something to consider as well. Loans with terms ranging from 15 to 30 years are the most common, but other durations are possible depending on your lender.
The Bottom Line
First, check your credit report before choosing a loan to see where you stand. You are entitled to one free credit report per year from each of the three major reporting agencies. Then, talk to a mortgage lender after you’ve identified and fixed any errors, working on reducing debt and improving your record of late payments.
You should also consider using one of the best credit monitoring services presently accessible to you to further protect your credit report from mistakes and other suspicious details. Pursuing financing before looking at homes and making offers can be an advantage. You’ll be able to act faster and might be taken more seriously by sellers if you have a pre-approval letter.
Still confused? Feel free to contact us and we will guide you to the best possible mortgage for your needs.