6 types of mortgage loans

You might encounter multiple types of mortgage loans when looking to buy a home, whether you’re a first home buyer or an experienced house flipper. It may prove to be helpful to understand the six most popular types of home loans and the options available to you as you negotiate one of your more complicated purchases.

There are many financing options available to you when you want to purchase a home.

Conventional loans

Your lender will likely first check if you are eligible for a conventional loan with good credit and stable income. A conventional mortgage loan is a loan that is not insured or backed by the government and comes from a private lender, such as a bank. Conventional loans come in two types: “Conforming,” the most popular type of loan, and “nonconforming”.

The amount of mortgage you are trying to obtain will determine the difference. Conforming loans are limited to maximum amounts of $510,000 in most areas (in 2020). They can only be sold to Fannie Mae or Freddie Mac. These government-sponsored entities also set guidelines and requirements for mortgages. They include a minimum credit score (usually 620) and a minimum downpayment of 3% for certain qualified borrowers.

Nonconforming loans include jumbo loans (which we’ll discuss later) and loans that don’t fall under another mortgage category. These loans can be used for poor credit, wealthy people with exceptional financial circumstances, or anyone with bad credit.

Best for

Conventional loans are the best option for people with excellent credit who want to get the lowest interest rates and have a simpler application process. As long as you are eligible, these loans will be less expensive than other home loans such as Federal Housing Administration loans.

Watch out for

You might not be able to qualify for a conventional loan if you have poor credit. Be aware that private mortgage insurance will be required if your down payment is less than 20%. This will increase the loan cost.

FHA loans

An FHA loan may be an option if you are concerned that you might not qualify for a conventional loan.

FHA loans, mortgages made by private lenders and insured by the Federal Housing Administration, may be eligible for a mortgage that you might not otherwise have been able to.

It’s important to remember that not all applicants are approved. You might need to pay a 10% downpayment if you have a credit score between 500 and 579. You might be eligible to pay as little as 3.5% if your credit score is 580 or better.

FHA loans can be attractive, but you should also consider the total loan cost compared to other options. More details are below. FHA loans are generally more expensive than conventional mortgages because of their flexibility.

Best for

FHA loans are a great option for those who can afford the monthly mortgage payment but have poor credit scores. If you are eligible, they may also allow you to purchase a home with a very low down payment.

Watch out for

FHA loans are more costly than other types of home loans because you have to pay the federal government’s guarantee. FHA requires that you pay mortgage insurance for all loans made through the program. The FHA requires you to pay for mortgage insurance on all loans through its program in two ways. One, an upfront payment is made as part of the closing costs. Two, a monthly premium.

For a $200,000 mortgage, the upfront mortgage premium is 1.75%. For a mortgage of $200,000, the monthly premium is usually 0.85% of the loan amount. This amounts to $1,700 per year. FHA loans are more complicated than conventional loans. You will need to cancel your mortgage insurance.

VA loans

A VA loan is available to veterans and active military personnel. The U.S. Department of Veterans Affairs (VA) guarantees mortgages to help eligible service personnel, veterans, and families buy homes. These mortgages will be arranged through a private lender, with the federal government guaranteeing part.

Even with the government guarantee, you will still need to meet your lender’s income and credit standards to be eligible for a VA loan. Although there is no minimum credit requirement, lenders will review your financial situation to ensure you can pay your mortgage.

Best for

VA loans can be very affordable if you are eligible. You won’t have to pay any down payments in many cases. You will also get better terms and lower interest rates with the VA guarantee, especially if your credit is not perfect. Another plus: VA loans don’t require mortgage insurance premiums.

Watch out for

To be eligible for a VA loan, you will need to apply for a certificate of eligibility. This document provides information about your military service record. You must have served at least 90 days, up to two years, depending on when you joined the military.

USDA loans

A USDA loan may be an option if you buy a house located in a rural area. USDA loans are programs offered by USDA that allow low- and moderate-income individuals to purchase homes in rural areas. Depending on your eligibility, these programs can either loan you money directly or guarantee loans made to you by private lenders.

Direct loans are available to those who don’t have enough housing or cannot afford traditional loans. The area in which you live must be less than 35,000 inhabitants. These loans are usually fixed-rate and do not require a downpayment. These loans can be applied for directly at a USDA Rural Development office.

Loan guarantee programs are much more common. An approved private lender will grant these USDA loans. To be eligible, you must be at least 115% below your local median income and reside in a rural area. You can search for your address on the USDA website to determine if it is located in a qualifying area. If you are eligible, there is no down payment.

Best for

USDA loans are great for rural residents with low or moderate incomes, as we have already mentioned.

Watch out for

You might not qualify. There are no minimum credit requirements. However, you will need to prove that you can repay the loan. Your monthly home payment should not exceed 29% of your monthly income.

Jumbo loans

A jumbo loan is necessary if you are buying a luxury home. A jumbo mortgage is larger than the Freddie Mac or Fannie Mae conforming loan limits (510,400 for most areas; higher in high-cost areas). Jumbo loans can range from $1 million to $2,000,000 in most cases.

Best for

People who require a significantly higher mortgage than the average U.S. house price or the average home price in their region are best suited for Jumbo loans.

Watch out for

A jumbo loan will require you to have good credit and make a substantial down payment. Remember that jumbo loans can have higher costs than a standard mortgage.

Reverse mortgages

A reverse mortgage is a loan that can be used to pay off your debts if you are over 62 and need cash. A reverse mortgage is a home equity loan that allows seniors to access their home’s value for additional retirement income.

A reverse mortgage allows the lender to pay you either a lump sum or monthly instalments. The lender will typically pay the remaining balance once you move out of your home. If you die, your spouse or estate must repay the loan.

Reverse mortgages allow you to borrow a maximum amount depending on the following factors:

• How old are you?
• Your home’s value
• Market interest rates
• Your ability to pay taxes and other household costs

Best for

Reverse mortgages are best for those over 62 who have regular healthcare expenses.

Watch out for

Reverse mortgages can cause you to owe more over time due to interest and fees. This means that your spouse, heirs, or other family members will need to sell the house to repay the loan.