A house is the most expensive purchase that most people make in their lifetime. People save up for years to buy a home, and they spend months comparing different types of mortgage loans. Even if you find your dream house, you may not be able to purchase it. The owner may not accept your offer, or it may be out of your price range. One of the worst feelings is finding a house you love but being unable to afford it.
Your mortgage loan will help determine the house you buy. Before you start house hunting, learn about the different types of mortgage loans.
Fixed Vs. Adjustable Rate Loans
All loans come with either an adjustable rate or a fixed rate.
With this type of loan, you won’t have to worry about the interest rate changing. It will stay the same as long as you are making mortgage payments. You monthly payments will also stay the same.
With an adjustable rate, the interest rate changes with time. Although the initial rate will remain the same for a set amount of time—usually five years—you can expect the interest rate to change every year after that. Despite its unpredictability, the benefit of an adjustable rate is that the initial rate is usually quite low.
Government Insured Loans
Some loans are government insured (or government-backed). With any of these different types of mortgage loans, the government reimburses some of the loss that can happen because of borrower default. There are three types of government insured loans.
Federal Housing Authority (FHA)
This type of loan is an option for all types of borrowers, but it is especially a favorite for first-time home buyers. This type of loan enables you to make a very small down payment on a house. If you have a FICO score of 500, you can expect to make a down payment of 10%. If you have a better credit score of 580 or more, you will be able to make a down payment as low as 3.5% with this loan.
Another great thing about a loan through FHA is the homebuyer doesn’t have to pay the down payment out of pocket. A family member or friend can make the down payment. You will have to pay for mortgage insurance, which will have a premium of 0.85% the loan amount.
Mortgage insurance protects the lender when the borrower is making a down payment of less than 20%. The insurance will cover the cost of mortgage payments if the borrower stops making them. In some cases, mortgage insurance can be a tax write-off.
Veterans Affairs (VA)
This type of government insured loan is available exclusively to veterans. With this loan, you may actually qualify to get 100% of your home financed. That means no down payment! You don’t even need to have mortgage insurance.
United States Department of Agriculture (USDA)
The final type of government insured loan is backed by the United States Department of Agriculture. You may qualify for this type of loan if you are from a rural area. You must have a lower, stable income but be unable to purchase sufficient housing for you and your family through conventional financing methods. You will qualify if you have a credit score of 640 or more.
Your income must be at the most 115% of the adjusted area median income. This is different for every county. With this type of loan, you won’t have to make a down payment, and your mortgage insurance payments will be very low.
If your loan isn’t government insured, it’s a conventional loan. This means the losses from default will not be reimbursed. With this loan, you have to make a higher down payment of 5 to 20%, but you may get to pay a lower interest rate. Another benefit of this loan is that you will not need to have mortgage insurance. These loans can be paid over a 10, 15, 20, or 30-year period. To qualify for this loan, you’ll need a FICO score of 620-640.
Conventional 97 Loans
Although this loan is not insured by the government, it won’t force you to make a large down payment on your house. With this loan, you’ll only have to make a 3% down payment! Although you might assume you need impeccable credit to qualify for this type of loan, that’s not always the case—though it still does need to be quite high. You might qualify for this type of loan with a credit score as low as 620 and still qualify.
Jumbo and Conforming Loans
There are different types of mortgage loans based on the amount they cover.
If you want a loan to cover an amount that is greater than the Fannie Mae and Freddie Mac loan limits, a jumbo mortgage loan is the way to go. You must have an exceptional credit score of 680 to 700 to qualify for this loan. You can also expect to make a larger down payment—usually between 15 and 20%. Because there is a greater amount of money involved, there is obviously a greater risk for the lender by allowing you to borrow the amount. For a jumbo mortgage loan, expect a higher interest rate.
Super Jumbo Mortgage
If you need a loan that is even bigger than the jumbo mortgage loan, you need to look into getting a super jumbo mortgage loan. These loans cover up to usually $1 million, which is definitely outside of the Fannie Mae and Freddie Mac loan limits. You will need even better credit for this type of loan than for a jumbo mortgage loan.
All loans that don’t fall into the jumbo category are considered conforming loans, because they conform to the loan limit. The loan limit varies depending on how expensive the area is. In some parts of the U.S., the limit is as low as $424,100. In others, you may be able to get a conforming loan for over $635,000.
A conforming loan is offered by a private lender and it won’t be insured by the government. You’ll need mortgage insurance for this type of loan, and you can expect a mortgage insurance premium of 0.5%.
Questions about Different Types of Mortgage Loans?
If you still have questions about different types of mortgage loans, talk to RateJab. We’ll match you with the very best lenders and get you quotes so you can choose the best lender to get your mortgage loan from. And, best of all, our service is completely free!