The 5 Most Common Types of Mortgage Loans for Homebuyers
The feeling of moving into a new home is so exciting. Well, maybe not the financial side of things. It can get very stressful just thinking about the amount of money the home will cost, the type of homeowners mortgage loan needed, and the down payment amount. It is do-able with the right research and a good idea of what you’re looking to spend.
Making a budget, reviewing your credit, having a monthly payment in mind can facilitate the process a little when trying to choose the right loan.
Below are some of 5 most common types of mortgage loans:
Conventional mortgage loans aren’t insured by the federal government. There are two types of conventional mortgages, conforming and non-conforming.
Let’s start with the conforming loan, it is a loan amount that falls within the maximum limits set by government agencies that back most U.S. mortgages. The non-conforming loans don’t meet those guidelines. As you may know, Jumbo loans are the most well-known non-conforming loans.
If you put down less than 20% of the home’s purchase price, lenders will generally require you to pay a private mortgage insurance (PMI) on the conventional loans.
Who is a conventional mortgage ideal for?
Borrowers with strong credit, a stable income and employment history and a required down payment of at least 3%.
Jumbo mortgages are conventional loans that have non-conforming loan limits which mean the home price exceeds the federal loan limit. In 2018, the Federal Housing Finance Agency’s maximum conforming loan was put in place for single-family homes in the U.S. for the amount of $453,100. Jumbo loans are more common in higher-cost areas and require more borrower documentation.
Who is a jumbo mortgage ideal for?
Jumbo mortgage loans make sense for more wealthy buyers that are purchasing a high-end home. Lenders look for borrowers with excellent credit scores, high incomes, and a significant down payment to put down on the home.
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The U.S. Government assists many Americans to become homeowners. They have three agencies: The Federal Housing Administration (FHA loans), the U.S. Dept. of Agriculture (USDA loans) and the U.S. Dept. of Veterans Affairs (VA loans).
FHA loans: These loans make homeownership within reach for those who don’t have a large down payment in hand along with those who may not have flawless credit. In order to get a maximum of 3.5% financing, the FICO score is needed to be above 580 to qualify. If your credit score hits below the 500 mark, you are required to put down at least 10% of the loan.
FHA loans require two mortgage insurance premiums, one that is paid upfront, and the other is paid annually for the life of the loan. This can ultimately increase the mortgage monthly payment. Paying 20% down or more takes away the PMI payment.
VA loans: VA Loans are for members of the U.S. military and their families, it can be for active duty members or veterans. The government assists them as much as possible for their services, the loans require no down payment or PMI, closing costs are generally capped and might even be paid by the seller.
VA loans do charge a fee called funding fee which is a percentage of the loan amount to help offset the program's cost to taxpayers. This fee and other closing costs can be put into the monthly payments or paid up-front.
USDA loans: USDA loans are for those who have moderate to low income that are searching to buy a home in rural areas. These loans have a USDA eligibility area that you can purchase from. Some of these loans don’t require down payments for eligible borrowers with low incomes.
Who is a government-insured mortgage ideal for?
These loans are ideal if you have a low credit score along with low cash savings. VA loans tend to offer the best terms and most flexibility compared to other loans for members of the U.S. military.
Fixed Rate Mortgages
Fixed Rate Mortgages keep a constant interest rate over the life of your loan, which is great because your monthly mortgage will never change. These fixed loans usually come in terms of 15, 20 or 30 years.
Who is a government-insured mortgage ideal for?
For those planning to stay put in their homes for at least seven to ten years, this loan offers a fixed rate which will ultimately help you set a comfortable budget.
Adjustable Rate Mortgage
Having an adjustable rate mortgage (ARM) can be beneficial or a disadvantage because it fluctuates with the current market conditions. It can help you look for an ARM loan that caps how much your interest rate and monthly mortgage rate can increase to.
Who is an adjusted rate mortgage ideal for?
Are you ready for the risk of interest rates fluctuating? If you don’t plan on staying in your home for longer than a couple years, an adjusted rate mortgage can save you quite a bit on your interest payments.