If you’re newly navigating the home buying process, this guide to different types of house loans will help you start off on the right foot.
When you’re beginning your first home buying experience, you’re probably focusing on all of the fun bells and whistles associated with homeownership, like the outdoor spaces, the size of the kitchen, or the neighborhood amenities. If you’re more practical, you may be focusing on the quality of the schools or trying to find a buyer’s agent who specializes in working with house hunters in your market.
Early in the process, however, you’ll need to focus on how you’ll finance that first home, including the types of home loans that are available to you and what it takes to qualify. We’ve rounded up eight different types of home mortgages to help you identify the products and processes involved in securing your loan so that you can make a more informed choice when it’s time to sign on the dotted line.
Requirements to Get a Mortgage
Your mortgage lender will look at a number of factors when determining your creditworthiness for a mortgage pre-approval. These include:
- Employment history and salary information
- Debt to income ratio
- Credit history, including bankruptcies or other adverse actions
- Down payment and cash reserves
You’ll want to start early by gathering information like paystubs, tax returns, and bank statements so that you can provide these to your lender and get an idea of how much you’ll be approved for in your home mortgage.
In addition, different types of house loans require different criteria and may involve an analysis of the area where the home is located, the home’s condition and appraised value, and other factors. It’s a good idea to talk to different lenders and ask about a variety of different types of home mortgages so that you can find the product that best fits your needs and requirements.
Types of Home Loans
Generally, when people consider different types of house loans, they are comparing conventional mortgage loans versus government-backed mortgages. Conventional loans are typically provided by a private lender like a bank or credit union.
Within the broad category of mortgage loans, there are two additional subcategories, depending on your individual requirements and credit history. These are conforming and nonconforming loans.
Even if a lender approves you for a conventional home mortgage, they may later decide to sell that loan and let another lender service the mortgage long-term. A conforming loan meets the guidelines set out by the Federal Housing Finance Agency (FHFA) so that it can be purchased by Fannie Mae or Freddie Mac, two government institutions that secure and service mortgage loans.
Thus, even if the loan is conventional, the lender may want it to be eligible for sale to a government-backed servicer. Conforming loans must be below a certain dollar threshold (which varies according to your geographic location), they cannot already be federally backed, and they must meet criteria that are specific to the lender.
As the name suggests, nonconforming loans do not meet the criteria for conforming loans. They may be larger, as in the case of jumbo loans, exceeding limits set out for federally backed loans. In other cases, the nonconforming loan may be a federally backed low or no money down mortgage, such as those provided by VA, USDA, or FHA.
A fixed-rate house loan may be either conventional or government-backed and may be offered for terms ranging from 15 to 30 years, or it may have custom terms negotiated at the time of borrowing. A fixed-rate mortgage locks in a specific interest rate for the life of the loan, allowing the borrower to secure a predictable, reliable repayment schedule.
By contrast, an adjustable-rate mortgage (ARM) may start out with a fixed rate for the first few years of the loan, then varies with a mortgage rate adjustment at regular intervals. These mortgage adjustment terms are reflected in the loan names. For example, a 5/1 ARM has a fixed rate for the first five years, then adjusts at one-year intervals thereafter for the life of the loan. Similarly, a 7/1 ARM has a fixed rate for the first seven years, then adjusts at one-year intervals thereafter.
While an ARM may have a more favorable interest rate upfront, it can be unpredictable thereafter and may result in a mortgage that grows less practical over the life of the loan. Long-term, you may choose mortgage refinancing into a fixed-rate loan should rising interest rates adversely affect affordability.
Backed by the Federal Housing Administration, an FHA loan can be a great option for first-time home buyers since it often requires a lower down payment and less stringent lending guidelines than conventional types of house loans. With as little as a 3.5% down payment, borrowers can often afford to purchase a home without waiting years to save up the 20% down payment some other types of house loans require.
Because you will have less equity in your home, however, you will be required to carry private mortgage insurance (PMI) and pay a mortgage insurance premium (MIP) every month as part of your home loan payment. This provides additional assurance to the lender that they will be able to recoup their investment should you be unable to make your loan payments.
You will be required to carry PMI for the life of your FHA loan. Otherwise, you will need to refinance your mortgage with a conventional home loan once you have earned 20% equity in your property.
The US Department of Veterans Affairs makes the VA loan available to active-duty service members, veterans, and their current or surviving spouses. This loan product allows qualified borrowers to finance 100% of the purchase price of their home at favorable interest rates without the need for private mortgage insurance.
The VA loan can be used repeatedly throughout the borrower’s lifetime, making it a great option for both first-time home buyers and those who are moving up to a larger home as their family grows.
The US Department of Agriculture guarantees loans for borrowers who are searching in rural areas. As long as the property qualifies according to USDA loan guidelines, the borrower may be able to finance their purchase with little or no money down. The purpose of the USDA loan is to encourage homeownership in areas where incomes are lower, making it harder to save up a down payment and qualify for a conventional home loan.
Bridge loans are often used by current homeowners to “bridge” the financial gap between the sale of their current home and the purchase of a new home. However, they can also be used by first-time home buyers who wish to put 20% down and finance with a conventional home loan, thus avoiding PMI and conforming loan requirements.
Find a Real Estate Agent to Guide You
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