Are we deep-diving into the types of mortgages here? Well yes, there are many types of home loans. Each comes with different requirements, interest rates, and benefits. Here are some of the most common types you might hear about when you’re applying for a mortgage.
Among the two main categories – conforming and non-conforming loans, non-conforming loans involve government-backed mortgages, jumbo and non-prime mortgages.
Conventional Conforming Loans: A conventional loan is a type of mortgage loan that is not insured or guaranteed by the government. Instead, the loan is backed by private lenders, and its insurance is usually paid by the borrower. Conventional loans are much more common than government-backed financing.
You can get a conventional loan with a down payment of as little as 3% of the purchase price of the home. If you put down less than 20% for a conventional loan, you’ll usually be required to pay a monthly fee called private mortgage insurance, which protects your lender in case you default on your loan.
Non-conforming Loans: Due to the loan amount or underwriting requirements, Fannie Mae and Freddie Mac typically cannot sell or buy nonconforming loans. The most typical kind of nonconforming loan is a jumbo loan. Because the loan amounts frequently exceed conforming lending limitations, they are known as jumbo loans.
Non-conforming Government-Backed Loans: The U.S. government isn’t a mortgage lender, but it does play a role in making homeownership accessible to more Americans.
FHA loans: Backed by the FHA, these mortgages provide affordable interest rates and make homeownership accessible for individuals with less-than-perfect credit or small down payments. To qualify for the maximum 96.5 percent FHA financing with a 3.5 percent down payment, you’ll need a FICO score of at least 580. However, if you put at least 10% down, a score as low as 500 is acceptable. Two mortgage insurance premiums are necessary for FHA loans, which can raise the total cost of your mortgage. Last but not least, the home seller is permitted to pay closing expenses with an FHA loan.
VA Loans: Homebuyer loans are supported by the U.S. Department of Veterans Affairs (VA) for eligible service members, veterans, and their spouses. Borrowers are not required to make a down payment in order to finance 100% of the loan amount. Less closing fees (which the seller may cover), better mortgage rates, and no requirement for PMI or MIP are other advantages.
USDA Loans: For low-income buyers in rural communities across the country, the U.S. Department of Agriculture (USDA) guarantees loans to assist make homeownership possible. As long as properties satisfy the USDA’s eligibility requirements, qualified borrowers can obtain these loans with little or no down payment.
Homebuyers in qualifying rural areas who have lower household incomes, little money set aside for a down payment, and who are otherwise ineligible for a conventional loan product can consider applying for a USDA loan.
Non-Conforming Jumbo Loans: Jumbo mortgages are home loan products that fall outside FHFA borrowing limits. Jumbo loans are more common in higher-cost areas such as Los Angeles, San Francisco, New York City, and the state of Hawaii, where home prices are often on the higher end.
Now that you have an idea of the right kind of loan for your home purchase, it’s time to find the right mortgage lender to make it happen. Every lender is different, and it’s important to compare shops to find the best terms that fit your finances.