Most would-be homebuyers can’t cash-purchase a property at any given moment. Thus we have mortgages.
Mortgage shopping requires time and due diligence. Learning about the different types of home loans (or refreshing your memory) is a good place to start.
What Are the Major Different Types of Home Mortgage Loans?
This is the most common loan type. It requires a down payment, and borrowers must meet certain credit thresholds.
Government agencies control this type of home loans: the Department of Veterans Affairs, US Department of Agriculture, and Federal Housing Administration. They reserve them for would-be homebuyers who meet specific conditions.
These are run by state or local government agencies, and sometimes directly by private lenders. They’re also reserved for specific borrowers.
Conventional Mortgages
Homebuyers pursuing conventional mortgages often meet the following conditions:
If this type of loan for homes is for a property valued at or below the current Federal Housing Finance Agency limit ($806,500, or $1,209,750 in high-cost areas), it’s a conforming loan. This means one of the government-sponsored entities (Fannie Mae or Freddie Mac) can buy it from the lender, lowering their risk.
(Conventional mortgages above the FHFA limits can’t be bought by the GSEs. These “jumbo loans” are harder to obtain, with credit score and down payment minimums around 700 and 10-20%, respectively.)
These loans don’t suit everyone. Firstly, the credit score, down payment, and DTI guidelines aren’t ironclad. Borrowers who meet them can qualify but be denied. (Lenders are more amenable to homebuyers who put at least 10% down, have credit in the high 600s, and a DTI around 35%.) Also, if you meet those higher standards but can’t put 20% or more down, you must pay private mortgage insurance.
Conventional loans can have fixed or adjustable interest rates. Fixed-rate mortgages have 15- or 30-year terms, with rates based on the Fannie Mae /Freddie Mac mean interest at purchase time.
Adjustable-rate mortgages have initial fixed-rate for five years, seven or ten years. After that, interest varies annually, often based on fluctuations in the Secured Overnight Financing Rate.
Federal Loans
Homebuyers who can’t get a conventional or jumbo mortgage should look into a government-backed type of home loan.
If your credit score falls between 500 and 579, you’re eligible for FHA loans, but must put 10% or more down. Those with 580 and above can make a down payment as little as 3.5%. FHA borrowers can also have DTI as low as 43%. These mortgages can be fixed- or adjustable-rate, with terms identical to their conventional counterparts.
There’s a value limit on what you can finance with an FHA loan; it varies by county. Mortgage insurance is also required, though premiums may be less than conventional PMI.
The VA reserves its mortgages for active and veteran servicemembers (or their surviving spouses). These have no credit score, down payment, or mortgage insurance requirements. You can use them to finance any property up to the FHFA conforming limit. Interest rates are often lower, and 15- or 30-year terms are available.
VA loans require a one-time fee. It won’t be more than 2.15% of the loan amount for first-time buyers paying 5% down or less.
These are the most niche federal loans, intended for rural-area properties and low- or moderate-income borrowers. (Income limits vary by region. They can be under $35,000/yr for a two-person household or well over $75,000/yr.)
If you’re eligible for a USDA loan, it’s worth considering: They require no down payment and always have 30-year terms. However, in addition to the income limits, the home value you can finance varies by region; it’s often as low as $398,600.
State, Local or Special Loan Programs
State and local governments (or private lenders) often limit eligibility for these loans to low-income or moderate-income homebuyers. In other cases, they’re reserved for those in public service professions (teachers, postal workers, EMTs, nurses, and so on).
Note that some of these aren’t mortgages. Some provide grants for down payments, apartment closing costs, and relocation expenses. Others must be used in conjunction with FHA loans. But it’s worth looking into what’s available regionally.
What’s the Right Type of Home Loan For Me?
To learn much more about any type of home loan, contact the Scout Mortgage experts. We’ll help you dig into specifics and find the right financing for your needs.
