There are many different types of mortgages available for those who are looking to purchase a property. Which of these loans is right for you?
The ultimate answer will depend on several different factors, including your eligibility for various programs, the amount you can use on a down payment, the source of your down payment amount, and your future plans.
The cost of the property you’re interested in purchasing, as well as your credit score, can also come into play.
The following mortgage guide will give you an overview of the types of home loans and mortgages available, as well as refinancing options. We always recommend that you consult with a loan officer in order to discuss your available options.
We’ll cover all the major loan types, including conforming loans, non-conforming loans, government-backed home loans, and home refinance loans. We’ll also discuss the different types of rate structures available as they pertain to interest rates.
Conforming loans are what most people think of when they are getting a mortgage. There are two types of conforming loans available.
Conventional loans, or conforming loans, are known as such because they meet the standards set by lenders such as Fannie Mae and Freddie Mac. Unlike the loans discussed above, they are not insured by the United States government and are offered by private lenders.
They require mortgage insurance, and while the loan-to-value must be above 80 percent, they do have private mortgage insurance (PMI) fees that are typically only 0.50 percent (lower than FHA loan PMI fees).
These loans have more strict requirements than most government-backed loans, with higher overall credit ratings required—in the 620 to 640 range.
Higher down payments are also a requirement, as low as 5 percent or as high as 20 percent. They do have some benefits, however, such as the fact that no mortgage insurance is required if the down payment is at least 20 percent.
Once the loan to value ratio reaches 78 percent, PMI fees are canceled.
For those who are planning to purchase real estate as an investment, conventional mortgages are a necessity, due to the fact that government-backed loans are only available to those who plan to use the home as a primary residence.
Conventional 97 Mortgage
Much like regular conventional loans in other ways, conventional 97 mortgages require only a 3 percent down payment. The “97” in the name refers to the fact that it’s a 97 percent loan-to-value. Not all lenders offer these loans.
Non-conforming loans refer to loans that exceed the limits set by Freddie Mac, Fannie Mae, and other large lenders. In most areas, the limit for conforming loans is $424,100, although it may be set higher in certain higher cost regions.
Jumbo Loans and Super Jumbo Loans
Jumbo loans are loans that exceed the usual loan limit in the region. They’re difficult to qualify for, requiring a credit score of 680 to 700, and also require a higher down payment (15 to 20 percent).
Some loans are referred to as, “super-jumbo loans,” which usually meet or exceed amounts of one million dollars. The upper limit of a super jumbo loan is often around three million dollars. These loans require excellent credit, and very high down payment amounts.
Government-Backed Home Loans
Since 1934, the federal government has worked to make getting a home loan easier, through the creation of the Federal Housing Administration (FHA). While this body does not directly offer home loans, they insure loans to cover the lender in the event a borrower defaults on their loan.
By doing so, they make lenders more inclined to take on less qualified borrowers, because the loan is less risky. Many lenders have lower loan requirements for government-backed home loans.
The most commonly used government-backed loans include FHA loans, Veteran’s Association (VA) loans, and United States Department of Agriculture (USDA) loans.
FHA loans are the most popular mortgage type for first-time home buyers. They have a much lower credit score requirement than any other mortgage type—borrowers with a FICO score as low as 500 can typically qualify.
They also don’t require a steep down payment, with 10 percent being the norm. If the borrower has a higher FICO score (580 or above), they may only require a down payment of only 3.5 percent!
Also, the down payment may be a gift from a family member or a friend, which isn’t typically allowed with other loan types.
First-time home buyers often flock to FHA loans because of these lowered requirements, and because they typically have lower credit scores and less money for a down payment, compared to those who aren’t buying a home for the first time.
In addition to these advantages, FHA loans can also often be used in conjunction with assistance and grants. They do feature one downside: the mortgage insurance premium, which is usually 0.85 percent of the loan every year.
VA loans are intended for veterans and are managed by the Veteran’s Administration. There are numerous benefits that accompany VA loans, including no down payment.
These loans also don’t require mortgage insurance. This can save homeowners on average $2,000 annually.
Also, since all VA loan options are backed by the government, the loans are much more forgiving of people who have credit scores that might result in poorer terms on a conventional loan.
In addition to their food and nutrition-related services and programs, the USDA also offers mortgages in some rural areas. The US Department of Agriculture manages loans that have low mortgage insurance fees and no down payments.
While farms or ranches may be the first types of property to come to mind when imagining rural areas, the eligibility for USDA loans is actually quite broad—over 95 percent of the United States is eligible.
FHA 203k Rehab Loans
FHA 203(k) loans are loans intended for the purpose of home purchase and renovation. With traditional FHA loans, the property in question already be in a livable condition
With FHA 203(k) loans, home buyers can purchase “fixer upper” homes and use some of the money from the loan to make renovations and repairs. Most of the requirements are similar to FHA loans but do require a somewhat higher credit score, usually in the 640 range.
Home Refinance Loans
Rate and Term Refinance
There are two types of rate and term refinancing options. FHA loans can be refinanced into conventional loans, and conventional loans can be refinanced to adjust the interest rate as well as the length of the mortgage (the term).
Typically, refinance loans are designed to lower your monthly payment as well as the interest rate.
In many cases, those who started their mortgage with FHA loans will opt to refinance because doing so allows them to drop their mortgage insurance and lower overall costs.
Home Affordable Refinance Program (HARP)
The Home Affordable Refinance Program, also known as HARP, was created by the Obama Administration. Its purpose was to assist those property owners whose home values fell dramatically during the crash of the housing market.
While refinancing to a lower rate used to be next to impossible for those whose homes were “underwater” (i.e., the value of the home was less than the amount still owed to the lender), this program allowed options to do so.
While this program ended in September of 2017, some lenders have modeled comparable options after HARP.
Home Equity Loans and Home Equity Line of Credit (HELOC) Loans
HELOC loans and home equity loans allow you to use the collateral you’ve built in your home to obtain a loan. They’re often referred to as a second mortgage because they require the property owner to make two payments.
Home equity loans can be helpful in a financial bind because they can provide a homeowner access to a lump sum of cash up to 80 percent of their home’s market value.
HELOC loans, on the other hand, do not directly provide cash—instead, they function as a line of credit which can be accessed as needed by the homeowner. During the term of the loan, the homeowner pays only the interest they’ve accrued on the borrowed amount.
Cash-out refinance loans don’t result in an extra payment. Instead, they allow the homeowner to refinance their mortgage and withdraw cash based on the equity they have in their home.
The interest rates are extremely competitive, at least when comparing them to typical home equity loans. As with home equity loans and HELOC loans, cash-out refinancing can generally give the homeowner access to 80 percent of the value of their property.
Many government-backed loans, including FHA, USDA, and VA loans, offer a streamlined refinancing program that results in a lower rate for the homeowner.
Most of these refinancing options do not require income verification or a credit check hence the term “streamline.” They do not require the same amount of intensive paperwork as other refinancing options.
Rate Structures (Fixed vs. Adjustable)
There are two types of rate structures when it comes to interest on home loans: fixed rate and adjustable.
Fixed rate loans offer the same interest rate for the entirety of the loan’s term.
Adjustable rate mortgages, also referred to as ARM loans, typically start with a lower interest rate over a defined term. This term is often five years, although it may vary by term or lender.
After that, the interest rate will increase annually. This can be helpful for new homeowners who are just getting started in their careers by offering a “cushion” until they are able to afford a higher interest rate.
30-Year Fixed Rate
Thirty-year fixed-rate mortgages are probably the most popular choice for homeowners, as it keeps monthly payments low, and the payment amount is always predictable since the interest rate doesn’t change.
15-Year Fixed Rate
While the monthly payment on 15-year fixed rate loan is higher, they offer other advantages—the most important of which is the fact that a more significant percentage of your monthly payment will go toward the loan’s principal balance.
Furthermore, homeowners save a lot by not paying interest over an additional 15 years. They also have lower interest rates in general, with qualifying borrowers receiving rates as much as a full 1 percefnt lower than longer-term mortgage loan options.
Adjustable rate mortgages, as discussed above, offer a lower interest rate initially. This interest rate then increases after a five-year period and continues to increase every year thereafter.
For buyers who are planning to sell the home and move in five years or less, or who anticipate being able to pay off the loan in only five years (assuming there are no additional penalties built in for early repayment), these loans can be a great way to save money.
The specific type of loan you decide on may be shaped by what you read here, but we strongly recommend meeting with an experienced loan officer in person before deciding.
For example, while many government-backed home loans are appealing, those with higher credit scores and income may be able to negotiate loan terms that are even more favorable.
Also, while fixed-rate loans are often considered preferable by many, adjustable rate mortgages can be extremely advantageous for those with specific plans to live in a house for a shorter time period.
Meet with an established, reputable loan officer. Lay out your financials and answer any questions they have that might pertain to eligibility in government programs or special programs offered by lenders.
Let them know what your plans are five years out and ten years out, and then examine the options available.
Remember, purchasing a home is a serious investment—one which may well shape the next decade or even the rest of your life. Choosing a particular type of mortgage could strongly affect that outcome, and it’s critical that you understand the ramifications of each of the different mortgage products.
Your budget, your future plans, and your past credit will all help shape your decision. Whether you opt for a government-backed home loan, a conventional loan, or a non-conventional loan, what’s really important is that you choose the home mortgage options that are right for you. There’s no one size fits all answer, and your loan officer can help.