Types of home loans

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When shopping for a home loan, it’s easy to get overwhelmed by the jargon and the types of mortgage products available to you. Learn more about the most common mortgages and see if you qualify for one of the types of specialty mortgages listed below.

Key points to remember

  • Conventional mortgages offer great rates and fees and the widest variety of conditions.
  • FHA loans can help less qualified borrowers become homeowners, but at a high cost.
  • USDA and VA loans are great deals for those who qualify.
  • Giant mortgages are available for expensive properties.
  • Interest-only mortgages are usually only a good idea in very specific situations.

Conditions and prices

Within each type of mortgage, the term and type of rate may vary.

Mortgage conditions

The most common mortgage terms (i.e. the term) are 30 years and 15 years. However, some local credit unions offer terms as short as two years. The term of your mortgage is how long it will take you to pay it off if you pay the correct minimum amount each month. A 15-year mortgage divides your loan and interest payments into 180 equal installments. A 30-year mortgage equals 360 payments.

Regardless of the length of the loan you choose, as long as your mortgage does not include a prepayment penalty, you can choose to make additional principal payments to pay off your mortgage faster without refinancing.

Fixed rate or variable rate mortgages

A fixed rate mortgage is a mortgage with a fixed interest rate for the life of your loan. If you take out a 30-year mortgage on January 1, 2022, at an interest rate of 2.99%, and you never move, refinance, or make any additional payments, your interest rate is still 2.99% when you make your final payment. January 1, 2052. A mortgage calculator can show you the impact of different rates on your monthly payment.

Conversely, a variable rate mortgage (ARM) has a rate that changes at defined periods. The most common mortgage ARMs are 7/1 and 5/1, but technically any ARM term is possible. On a 7/1 ARM, the rate remains the same for the first seven years and is then adjusted annually thereafter.

Adjustable rate mortgages became very popular before the subprime mortgage crisis because they offered lower upfront payments, but then led to a wave of foreclosures as rates rose and made mortgage payments unaffordable for investors. thousands of Americans. ARMs are risky for most borrowers and are generally not a good choice, unless they intend to pay off their mortgage or refinance before their rate adjusts.

Conventional mortgages

Conventional mortgages are the most common type of mortgage loan. They generally have more stringent requirements than government guaranteed mortgages and are offered by most lenders.

Who are conventional mortgages for?

Conventional mortgages are best for qualified buyers who are not part of a specific population to be eligible for special government-backed financing.

Requirements

  • 620+ credit score
  • At least 3% for a down payment (a PMI will be required if less than 20% down payment)
  • Verifiable income for more than 2 years
  • Debt-to-income ratio of 45% or less

The specific requirements may vary depending on the lender you are using.

Government-backed mortgage programs

Over the years, the government has created many special home-buying programs to encourage rural development, help revitalize low-income neighborhoods, and help veterans become homeowners.

USDA loans

USDA loans were originally created to help provide mortgages in rural areas lacking in development. They are a unique and extremely attractive option for those who qualify because they allow borrowers to put 0% down and do not require any form of private mortgage insurance (PMI).

Who are USDA loans for?

USDA loans are the best for anyone who can qualify.

Requirements

  • The property must be in an area designated as rural by the USDA.
  • The borrower’s household income must meet the eligibility limits.
  • Debt-to-income ratio as high as 41%, with few exceptions.
  • 640+ credit score, with some exceptions.

FHA loans

Federal Housing Administration (FHA) loans are loans insured by the FHA, but issued by any lender approved by the FHA. FHA loans differ from HUD loans, which only apply to unique circumstances like Section 184 loans for Native Americans. In general, FHA loans exist to help low-income borrowers buy a home and have more lax income, credit rating, and down payment requirements. FHA loans tend to have higher interest rates and fees than conventional mortgages and require an initial mortgage insurance premium equal to 1.75% of the loan amount as of 2021, in addition to an annual mortgage insurance premium.

Who are FHA loans for?

FHA loans are best for people who cannot qualify for other home loans because the other options tend to be much cheaper up front and over the life of the loan.

Requirements

  • Credit score as low as 500 with 10% decline or as low as 580 with 3.5% decline.
  • Down payments as low as 3.5%
  • Verifiable income for more than 2 years
  • Debt-to-income ratio of 43% or less

VA loans

US Department of Veterans Affairs (VA) loans similar to FHA loans are guaranteed by the VA, with VA requirements, which are issued by lenders approved by the VA. They are similar to USDA loans in that they do not require a down payment or mortgage insurance. They offer competitive interest rates and have more lax requirements than conventional mortgages. In general, borrowers must be veterans who have served for a certain length of time or under special circumstances.

Who are VA loans for?

VA loans are the best for anyone who can apply for them.

Requirements

  • Borrowers must have a certificate of eligibility from the VA, which they can apply for here.
  • No minimum credit score. The lender should consider the borrower to present a satisfactory credit risk.
  • Debt-to-income ratio of 41% or less
  • Down payment as low as 0%
  • Verifiable income for 2 years and more with a few exceptions.

Other unique mortgage products

Giant mortgages

Jumbo mortgages are loans whose amounts exceed the limits for conventional mortgage loans set by the Federal Housing Finance Agency (FHFA) and are generally issued on luxury properties or in areas where housing costs are exceptionally high. students.

Who are Jumbo mortgages for?

Jumbo mortgages are best for qualified buyers who are purchasing expensive properties that do not qualify for conventional mortgages and do not have the money or the assets to purchase a property. Collectively, these borrowers are referred to as HENRY (High Earners, Not Rich Yet).

Requirements

  • 700+ credit score
  • Deposit of at least 20%
  • 2+ years of verifiable income history
  • A debt-to-income ratio of less than 43%

Interest-only mortgages

Interest-only mortgages mean that borrowers only pay the interest portion of their loan for a set period of time. The borrower does not gain any equity in the house during these payments and will either have to pay off the mortgage in a lump sum or significantly increase the payments in the future depending on the terms of the loan.

Who are interest-only mortgages for?

Interest-only mortgages are best suited to people who currently have fixed assets that will soon be available, who receive large periodic premiums with which to repay the principal, or who can expect their income to increase significantly before the mortgage payments. principal do not become due (such as a medical student about to graduate and has a signed employment contract).

Requirements

Interest-only mortgages are a niche specialty product with no set requirements. Expect to have to show substantial assets and / or documentation proving your future ability to meet payments when they increase.

Should I get an FHA loan or a conventional loan?

A conventional loan is cheaper initially and in the long run than an FHA loan, as long as you can be approved for a conventional loan.

Should I get a VA loan or a conventional loan?

If you are able to get a VA loan, you can pay better rates with lower fees and less money, making it a better choice for most borrowers than a conventional loan.

How much money should I put in?

If you have a large amount of money, then putting 20% ​​less will save you on mortgage insurance premiums and make you a more qualified buyer, offering you the best rates. With current mortgage rates as low as they are, anything over 20% cash on hand could most likely work better in a retirement savings vehicle like an IRA, 401 (k), or HSA and save you money. immediate tax.

The bottom line

Conventional fixed rate mortgages are the most popular type of home loan for a reason: they offer the most competitive rates and fees, and are easy to find. For people who cannot qualify for a conventional mortgage, FHA loans, VA loans, and USDA loans can help low-income buyers with fair or better credit become homeowners. In addition, VA loans and USDA loans have attractive terms and benefits for those who qualify. Whatever type of loan you choose, be sure to calculate how a mortgage payment fits into your overall budget, and determine if buying a home is the right choice for you.


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