When buying a home, there are many types of mortgage loan options to choose from. In order to get the right mortgage, it’s important to understand each option thoroughly so you can determine which one works best for your financial situation and your down payment situation. Here are 10 types of mortgage loan options for you to consider when purchasing a home. You can click on the links to get more details about each type or click here to request further information from our team of experts on how to get the best mortgage loan deal that fits your needs.
1) Conventional Loans
Conventional loans, which are also called conforming loans, follow guidelines issued by Fannie Mae and Freddie Mac. They’re generally easier to qualify for and have lower down payment requirements. If you want to be financially responsible and still get a mortgage loan with a low down payment, your best bet is to go with a conventional loan. These loans are typically less risky for lenders than other types of mortgages because they require fewer initial points (costs) paid upfront. Also, if you can afford it (and your credit is in good standing), you may get some extra perks from lenders who offer them including discounts on closing costs or pay-offs on existing home mortgages.
2) FHA Loans
FHA loans are an excellent option if you have poor credit or haven’t had a lot of time to build up your credit history. Not only do they allow people with lower scores to apply, but these loans usually come with lower down payments and better interest rates than conventional loans. They are also known as USDA Loans because they help rural communities get homeownership opportunities that would otherwise be unavailable. Because there is less documentation required, an FHA loan is often easier to obtain than other types of home loans. Even if you don’t qualify for FHA lending, you may still be able to find another mortgage loan that’s right for you.
3) VA Loans
If you’re purchasing your home with no down payment, a VA loan may be right for you. There are two types: direct and guaranteed. A direct VA loan is issued by a private lender while guaranteed loans are issued by Fannie Mae or Freddie Mac. Guaranteed loans often have lower interest rates than those available through private lenders and don’t require a down payment, but they are limited to veterans who fall into certain income brackets. Another advantage is that if your credit is less than stellar, you may still qualify for one of these loans because their requirements aren’t as stringent as other mortgages.
4) USDA Loans
USDA loan eligibility has income limits that are well below what most Americans would think they can afford. In addition, USDA loan programs are only available in certain states and counties across America. They do not have mortgage insurance like FHA loans, so you might pay slightly more in interest than with an FHA or VA mortgage loan. If your monthly budget is tight but you’d still like to buy a home within USDA-approved parameters, take advantage of The Dream 100 ProgramTM.
5) Jumbo Loans
If you’re planning to buy a home that costs more than $417,000—the standard limit for conforming loans set by Fannie Mae and Freddie Mac—you’ll need a jumbo loan. Jumbo mortgages are not guaranteed by either agency and require lenders to determine their own qualification criteria, making them riskier (and therefore less common) than conventional loans. If you decide to go with one, know that jumbo rates are typically around one percentage point higher than conforming rates; qualifying income is also usually higher.
6) The second mortgage market
If you’re looking to buy a home in an area where homes are typically expensive, then USDA loans might be right for you. These mortgages require zero down payments and have an average interest rate that is less than 4 percent. However, if you put at least five percent down on your home purchase, or if your monthly income exceeds 50 percent of area median income (AMI), these loans may not make sense. These are also single-family only loans—if you plan on owning more than one property or want to finance anything besides a traditional residence (e.g., commercial real estate), then it’s worth learning about other types of mortgages available.
7) USDA loans are an underused resource
First-time homebuyers and low- to moderate-income borrowers are especially underutilizing USDA loans. First-time homebuyers don’t know about these federal loans, which could be leaving some money on the table in terms of savings. As for low- to moderate-income borrowers, these loans may not require down payments or may have better interest rates than other loans on offer from lenders who target low-income families—say, a mortgage lender that offers subprime mortgages. The USDA also allows financing up to 100% loan-to-value (LTV), which is twice as much as conventional FHA and VA loans allow. Borrowers with high LTV ratios can get more houses for their buck if they go with a USDA loan.
8) Know your options
Though most people will choose either an FHA loan or a conventional loan when buying a home, there are several other options. VA loans are typically only available to those who have served in the military. Conventional loans are generally easier to qualify for than government-backed ones, but often require private mortgage insurance (PMI) in order to protect lenders if things go wrong with your loan. Alternative mortgages include low-documentation loans and silent second mortgages that require no monthly payments but create significant financial risk if interest rates rise or your income drops over time. To learn more about all 10 types of mortgages, click here!
9) If you need help, ask.
It’s tempting to try and tackle everything yourself, but if you encounter roadblocks along your journey, don’t be afraid to ask for help. The Internet is rife with advice about how to get started on your mortgage application and what questions to ask when you’re house hunting. If it seems like too much at once, remember that all mortgages are different; getting familiar with what types exist is an important first step. Making sure you have all your i’s dotted and t’s crossed is important—but it doesn’t need to be intimidating!
10) Take your time and do it right.
Whenever you buy a home, you’ll hear about being pre-approved for your mortgage. But, do you know what that means and why it’s important? Before looking at homes, take time to discuss with your real estate agent how much home you can afford and to get pre-approved for your mortgage. Doing so will help eliminate any surprises when it comes time to look at actual homes—you won’t accidentally fall in love with something that’s out of your price range.