5 Types of Mortgages for Homebuyers
Whether you’re a first-time homebuyer or this is your fourth or fifth home, mortgages always present a unique complication.
With so many choices available, it can be difficult to know which loan is best for you. Even if you’ve dealt with mortgages before, as your situation changes, a different type of loan may be better this time around.
Before committing to a mortgage to use for your new home, it’s important to take some time and consider all of your options. One loan may be a better choice than another, or you may be satisfied with two or three different loan options. Before signing a contract and choosing a lender, take the time to learn about the 5 types of mortgage loans below.
1. Conventional loan
Conventional loans are what most people imagine when they think of a mortgage. This type of loan is not guaranteed by the government, so your home will usually serve as collateral in case you are unable to repay your loan.
With a traditional loan, you have two options: compliant and non-compliant. The differences between them are quite significant, so be sure to read them carefully before going ahead with a conventional loan. The most important thing to know about them is that conforming loans meet all FHFA requirements, while non-conforming loans do not.
Conventional loans can be used to buy a primary home, vacation home or investment property and you may be able to pay just 3% down payment through Fannie Mae or Freddie Mac. Once you hit 20% equity, you can even ask your lender to cancel your private mortgage insurance and save a little on your monthly payments in the future.
Unfortunately, to qualify for a conventional loan, you’ll need a credit score of at least 620, even if you’re refinancing. Your debt to income ratio (DTI) must also be below 43% and you will have to pay for the PMI if your down payment is below 20%.
2. Loan guaranteed by the government
There are different types of government guaranteed loans that different people can qualify for. If you qualify, these mortgages can be a great way to find a low or no down payment or avoid paying PMI or MIP.
Here are some of the government backed mortgages you may find you qualify for.
FHA loans are backed by the Federal Housing Association and only require a 3.5% down payment. If you meet the eligibility requirements, this type of loan may be ideal for those with a lower credit score and those who cannot afford the traditional 20% down payment amount, but still want to a secure loan they know they can trust.
VA loans are backed by Veterans Affairs and are available to veterans and active duty military. If you or your partner are eligible for a VA loan, it is almost always recommended that you take one.
VA loans have no down payment requirement, require no PMI or MIP, and have no minimum credit score requirement. There are financing fees, but they can usually be lumped together with the cost of the loan or closing costs which are usually capped.
For properties located in rural areas or other USDA eligible areas, you may be able to take out a USDA loan. There are specific income requirements, but some borrowers may be exempt from a down payment. USDA loans have additional fees and require mortgage insurance, but they can be a great way to buy rural property.
3. Fixed rate loan
Fixed rate loans come in two options: 15 years or 30 years. Whether you choose a longer loan term or a shorter loan term, however, the idea behind a fixed rate loan remains the same.
Throughout the term of your loan, the interest rate will remain the same. You won’t have to worry about fluctuating interest charges and your monthly payments will always stay the same, but you’ll usually pay a higher interest rate than on a variable rate loan and you’ll end up paying a little in the global interest.
4. Adjustable rate loan
Unlike a fixed rate loan, adjustable rate loans will have fluctuating interest rates over the life of the loan. This may mean that your monthly payments go up for a while before coming down again. Over time, you’ll likely end up paying less interest, but fluctuating monthly costs could make your loan unaffordable and lead to loan default.
5. Giant Loan
Jumbo loans are common in areas where prices are extremely high, such as Los Angeles, New York and Hawaii. They don’t meet FHFA requirements because they’re above the set limit, but they allow you to buy a more expensive property if you need or want it.
For a jumbo loan, you will typically need to make a 10-20% down payment, have a minimum credit score of 700 or higher, have a DTI of less than 45%, and provide a significant amount of assets in the form of either cash or a loan. savings account.
Jumbo loans are good for buying expensive homes, but you’ll need great credit and a variety of documents before you’re approved for one. They aren’t suitable for all home sales, but they can be useful for those who live in expensive metropolitan areas and want to buy their own home.
Find your perfect mortgage
Every lender and loan will be different, so be sure to take your time when looking around. With enough research and professional help, you’ll be able to find the perfect mortgage for your new home in no time. As you search, however, it’s important to remember to stick to your predetermined budget and only seek loans through approved lenders to avoid scams or exorbitant fees.