Five Different Types of Home Loans
Posted on July 30, 2020
Buying a home is incredibly exciting, but understanding the financial side of the process can seem overwhelming. Choosing a home loan does not need to be a painful process, though. Once you have taken some time to understand the different types of home loans, the process will seem easier.
Before you choose a type of home loan, we recommend deciding on your budget and how much money you will put down in a down payment. Once you have reviewed your credit score, you will have a more clear idea about which type of home loan works best for you and your family. Below, we will go over the most commonly used mortgage loans.
1) Conventional Mortgages
Conventional mortgages are the most common types of home loans. These home loans are not insured by the federal government. Conforming and non-conforming loans are the two key types of conventional loans. A conforming conventional loan falls within the maximum loan limits set by Freddie Mac and Fannie Mae, which are government agencies that back most U.S. mortgages. When conventional loans exceed these limits, they are considered to be non-conforming loans.
Conventional mortgages are not guaranteed federally. Conventional loan down payments can be as low as 3% of the total purchase price of the home. Qualifying for conventional loans is often harder than qualifying for loans backed by the government.
Typically, if you choose a conventional loan and you put down at least 20%, you will not have to pay for mortgage insurance. In most cases, loans require lower down payments and loans backed by the government require you to pay for mortgage insurance. You can ask your lender to allow you to cancel your private mortgage insurance once you have paid 20% of your home cost into equity.
Many people choose a conventional mortgage loan because it can be used with a person’s primary home, second home, or even an investment property. On the other hand, conventional mortgages can be more difficult to obtain. You will need to have a debt-to-income ratio of at least 45%.
2) Jumbo Mortgages
Jumbo mortgages are one type of conventional loan. These loans have non-conforming loan limits. The name “jumbo” comes about because the prices of these homes are high, exceeding the federal loan limits. Loan limits vary based on the cost of living in geographical areas. For example, the maximum conforming loan limit in 2020 for a single-family unit is $510,400. If you live in a high-cost area, the maximum loan amount for a single-family home is $765,600. Jumbo loans can be necessary when you live in an area with a high cost of living. If you need to buy a home in an expensive area, you will likely need to qualify for a jumbo home loan. The good news is that the interest rates for jumbo mortgages are typically competitive with other types of conventional loans.
The downside of jumbo mortgages is that you will need to pay a downpayment of at least 10 to 20%. Typically, you will need to achieve a FICO score of at least 700 to qualify for a jumbo loan. Some loan providers will issue loans with a minimum score of 660 however. We always recommend taking time to consider how much you can truly afford before taking out a jumbo loan. For affluent buyers, however, a jumbo loan can be the best option.
3) Mortgages Insured by the Government
Some home loans are backed by the federal government. These home loans make it possible for potential homeowners who do not have a large down payment to purchase a home. Currently, three different federal government agencies back loans:
- Federal Housing Administration (FHA loans)
- U.S. Department of Agriculture (USDA loans)
- U.S. Department of Veterans Affair (VA loans)
VA loans are used frequently by active duty service members and veterans. VA loans are particularly appealing because they do not require a down payment or private mortgage insurance. Additionally, closing costs are usually caped and are often paid by the seller, helping people who may not otherwise be able to qualify for a mortgage to purchase a home.
Keep in mind that VA loans do require a funding fee, which is a percentage of the total amount of the loan. Thankfully, closing costs, including this fee, can become rolled into the loan in most cases. Borrowers can opt to pay the costs upfront at closing as well. USDA home loans allow low-income borrowers to purchase homes in rural areas.
4) Fixed-Rate Mortgages
Fixed-rate mortgages are mortgages that maintain the same interest rate over the lifetime of the loan. In other words, your mortgage payment will remain the same for the entire term of your mortgage. If you took out a 30-year mortgage, you will pay the same amount on your loan every single month. Fixed-rate mortgages are beneficial because they can help you budget every month because you know exactly what you will be paying monthly.
5) Adjustable-Rate Mortgages
Adjustable-rate mortgages (ARMs) have interest rates that go up or down based on market conditions. Keep in mind that the interest rates can change at any time, causing your monthly payments to increase without much notice. Many borrowers choose ARM mortgages because they end up saving a substantial amount of money on interest payments.
During the first few years of homeownership, borrowers enjoy a lower mortgage rate. We only recommend that borrowers who are comfortable with a certain level of a risk take out ARM mortgages. For example, if you do not plan on living in your home beyond a few years, you may save significant money by taking out an ARM mortgage.
Contact Our VA Loan Professionals Today
If you are looking to purchase a home, Justice Roberts, your mortgage lender, is here to help. Located in Federal Way, Washington, we help clients throughout the country find the best mortgage option available. Fill out an online application today or contact one of our friendly mortgage experts to learn how we can help you achieve your dreams.