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It’s the question that every first-time homebuyer asks: What types of loans are available? I’m glad Your mortgage lender can offer many different types of home loans. They are all designed for different situations, so it’s crucial to explore your options with a qualified mortgage professional. Let’s take a look at some standard loan programs.
Conventional Mortgage Loans:
Conventional mortgage loans are offered by private lenders such as banks or mortgage companies that adhere to the Federal Housing Finance Administration loan limits and meet Fannie Mae and Freddie Mac’s requirements. These require at least a 10% down payment and offer more flexibility on types of properties purchased than other loans do. Examples include…
Fixed-rate Mortgages:
The most common kind of conventional loan, fixed-rate mortgages, allows borrowers to pay back a set amount of money in monthly installments. These loans have a steady interest rate until you either choose to sell or refinance. Most come with a 15-30 year loan term. The positive of a fixed-rate mortgage is predictable monthly payments, allowing you to budget expenses accurately without worrying about housing market fluctuations.
Adjustable-rate Mortgages:
ARMs only have a fixed interest rate for the first few years of the loan term. Afterward, your interest rate resets to reflect market conditions at specified intervals. For example, a 10/1 ARM has a fixed interest rate for the first ten years and is subject to market fluctuations every year after that. ARMs might work best if planning on relocation within 5-10 years after the purchase.
Interest-only Mortgage:
Interest-only mortgages allow you to pay only the interest portion of your monthly bill for the first few years of your loan. However, the principal amount will be due once this period is over, meaning your monthly payments will increase dramatically due to the delay in repayment. These loans are not advisable unless the borrower is confident they will pay back the principal amount once it is due.
Jumbo Mortgage:
Exceeding the feral loan limits set by the FHFA, Jumbo Mortgages are nonconforming conventional mortgages, allowing you to borrow more than the government-set limit, which usually averages out at around $500,000. Jumbo Mortgages help purchase homes in more expensive areas such as New York and Los Angeles. Jumbo Mortgages tend to be a bit riskier on the lender’s side as they do not come with government protections if the borrower defaults, so they usually require stricter qualification standards, such as a credit score of at least 700 and a low debt-to-income ratio. A borrower will have a high chance of qualifying for a jumbo mortgage if they have plentiful cash reserves, but the down payment and interest rates will still be on the higher end than with a conforming loan.
Government-backed Mortgage Loans
There are several types of government agencies that purchase loans from private lenders. These specific loans are designed to make owning a home more accessible to borrowers with little savings and poor credit scores.
FHA Loans:
The Federal Housing Administration loan is accessible for borrowers with little to no savings as it can require as little as a 3.5% down payment, with lower monthly mortgage insurance premiums. It’s not available for every property, though. FHA loans tend to be popular with first-time homebuyers, albeit with a few conditions, such as limiting how much you can borrow (depending on the state).
VA Loans:
If you’re a veteran or active-duty military member, a Department of Veterans Affairs loan might be perfect for you. This type of loan is also available to eligible service members, spouses of service members who died in the line of duty or have a service-related disability. VA loans do not require a down payment or mortgage insurance. There are also no prepayment penalties, allowing eligible VAs the ability to pay off their loans faster.
USDA Loans:
Built to assist families living in rural areas, loans issued through the United States Department of Agriculture are advantageous for low to middle-income applicants who do not qualify for other kinds of mortgages due to a low credit score. The government finances the entirety of a USDA-eligible home’s value, which is great for borrowers who do not have the savings for a down payment. The USDA partners with local lenders and ensures loans that are part of its program. Since local lenders have been guaranteed repayments if borrowers default, interest rates on USDA loans often remain low.
We’re there for you.
With so many mortgage types to choose from, it can be tough to know which one is best for you. You may want the convenience of an adjustable-rate loan with a low interest rate, but your credit score might not meet the requirements. Or, you may need to take out a home equity line of credit (HELOC) because your down payment isn’t enough for all that you want. There are plenty of loans available, and we’re here to help find the right one for you!
