Types of Home Loans
FHA Loans
FHA loans are insured by the Federal Housing Administration, which means that if you default on your loan, the government will step in and help you pay it back. These loans are perfect for first-time homebuyers because they offer lower down payments and relaxed credit requirements. Homebuyers with a credit score of 580 or higher qualify for a down payment as low as 3.5%, while homebuyers with a credit score of 500–579 qualify for a down payment of 10%.
One thing to be aware of when using an FHA loan is that if the down payment is less than 20%, the buyer will be required to pay a mortgage insurance premium (MIP). This is a monthly fee that helps protect the lender in case the buyer defaults on their loan, and it's automatically added into the mortgage payment. If the down payment is less than 10%, the MIP lasts the life of the loan, but if the down payment is more than 10%, it will last 11 years before being automatically canceled.
VA Loans
VA loans are mortgages offered by the Department of Veterans Affairs to military veterans and their families. These loans offer a number of advantages, including no down payment required, no mortgage insurance required, and competitive interest rates. In addition, VA loans can be used to purchase a home, refinance an existing mortgage, or remodel a home. There are four different types of VA loans, each with a different intended use:
- Native American Direct Loan (NADL)
- VA-Backed Purchase Loan
- Cash-Out Refinance Loan
- Interest Rate Reduction Refinance Loan (IRRRL)
Conventional Loan
A conventional loan is a mortgage that is not backed by the government like FHA or VA loans. This type of loan is typically offered by private lenders and requires a down payment of at least 20%. A conventional loan has a fixed interest rate and term, meaning monthly payments will remain the same for the life of the loan.
Conventional loans can be either conforming loans or non-conforming loans. A conforming loan is a mortgage that meets the requirements set by Fannie Mae and Freddie Mac. These requirements include a down payment of at least 20%, a credit score of 620 or higher, and debt-to-income ratio of 45% or less. A non-conforming loan is a mortgage that does not meet the requirements set by Fannie Mae and Freddie Mac. This type of loan is offered by private lenders and usually has a higher interest rate than a conforming loan.
Jumbo Loan
A jumbo loan is a mortgage that is larger than the limits set by Fannie Mae and Freddie Mac. These limits vary by location, but in most areas, a jumbo loan is any mortgage that is larger than $453,100. Jumbo loans are typically used to purchase or refinance high-priced homes. Jumbo loans usually have a higher interest rate than conforming or non-conforming loans and require a larger down payment.
USDA Loans
USDA loans are mortgages that are backed by the United States Department of Agriculture. The loan was originally offered as an incentive for homebuyers to move to select suburban and rural areas to help build their economies. These loans offer a number of benefits, including no down payment required, low interest rates, and flexible credit requirements. In addition, USDA loans can be used to purchase a home, refinance an existing mortgage, or remodel a home.
Because only homes in select areas are eligible for USDA loans, it's important for homebuyers to check an official USDA eligibility map to ensure the loan is available to them.
Choose the Loan That's Right For You
There are a number of different types of mortgages available to homebuyers, each with its own advantages and disadvantages. It can be difficult to decide which one is the right option, but it’s important to understand the differences between them before making a decision. Keep in mind that most, if not all, lenders will require a home appraisal to approve the loan, even if the buyer has been pre-approved up to a certain borrowing limit. Getting a home inspection is a good idea to protect your new investment, too.
For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.
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Shannon Katz, Realtor. 970-366-7644 c.
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