Before you get too deep in your search for a new home, you will want to secure your financing. You may know a thing or two about traditional mortgages, but did you know that they are not your only option and that different types of mortgages are available?
What are the Different Types of Mortgages?
Before applying for a mortgage and making a final decision, you will want to consider and research all mortgage options. And taking a closer look at things like your credit score, your income, the type of home you’d like to buy, etc., will help you narrow down the best type for you.
First things first, though – know your options. So, let’s talk about some of the different types of mortgages available.
Conventional Loans
Conventional loans are those that come from a bank or other type of private lender. They often require a specific level of stable income, credit score, and down payment. These loans can vary greatly in their amounts, but a conforming loan is meant to be sold to government-supported companies like Fannie Mae or Freddie Mac and has a general cap of around $647,200 as of 2022. The majority of homebuyers use this type of loan.
These loans tend to cost less than other types of loans and have a fairly simple application process, too. The downfall is that not everyone will qualify for them.
FHA Loans
FHA loans are loans that are offered by private lenders and insured by the Federal Housing Administration (hence their name). The eligibility criteria for these loans tend to make it much easier for more people to qualify for a loan. For instance, those with lower credit scores may find that this is a great fit – though it is important to keep in mind that the down payment may also vary depending on the credit score.
For individuals who may not qualify for a conventional loan, an FHA loan may be the next best thing.
VA Loans
VA loans are reserved for veterans or those who are actively serving in the U.S. military. These loans are backed by the U.S. Department of Veterans Affairs and are designed to help veterans buy homes. You must have been in the military for a certain length of time to qualify.
VA loans come from a private lender, but they are guaranteed, in part, by the government. As a result, it makes it easier to get access to better interest rates and loan terms, even with not-so-great credit. Plus, there is no down payment required.
USDA Loans
The U.S. Department of Agriculture provides loans to low-income and middle-income families looking to buy homes in rural areas. Depending on which route you choose, the USDA loan could be your direct lender or guarantee loans made by private lenders. These are often fixed-rate loans without the need for a down payment.
There are a few criteria that must be met in order to qualify for these types of loans, such as living in an area with a population of less than 35,000, being unable to afford conventional loans, and having an income that doesn’t surpass a certain % of the median income for the area.
Due to the nature of these loans, you will have to prove that you are able to pay them back.
Jumbo Loans
Individuals who are purchasing a home that is quite costly may not be able to just get by with a conventional loan since there is a cap on conforming loans. Instead, non-conforming jumbo loans go up into the millions and are often the best option for those seeking out these high-priced homes.
Due to the risk involved with the large sum of money, this type of loan often requires a significant down payment, and the costs you may incur throughout the process may be higher than you’d expect with a conventional loan.
Know This Before Choosing Your Home Loan
While deciding between the different types of mortgages, there are a few things you may encounter that you will want to consider. For instance, what is the difference between a variable and a fixed loan? How long should you take out a loan? What happens if you are buying a new construction home?
Interest Rates
In a nutshell, fixed-rate loans offer a fixed interest rate that never changes throughout the life of the loan. Variable-rate loans – also referred to as adjustable-rate mortgages – have a fluctuating interest rate that can increase or decrease based on market conditions.
It is not uncommon for some loans to start out with a fixed interest rate and then switch to an adjustable rate after a number of years. These loans can be risky as you never know what the future holds, but their appeal is the low-interest rate at the beginning. When deciding between the two, don’t hesitate to consider your long–term plans.
Term Length
You will encounter the fact that all loan terms are not the same. The most commonly available loan terms are 15-year, 20-year, and 30-year. The length you choose will depend on many different factors, but know that the shorter the term length, the more you save in interest.
New Construction
If you are buying a new home that has not been built yet, short-term construction loans are available to fund the building. Often these loans can be converted to a regular mortgage once the construction phase is complete.
Choosing the Right Mortgage
Buying a home is one of the biggest investments you will make in a lifetime. So, as you head out on your quest to find the perfect home, know that the perfect mortgage is out there for you, too. Don’t just go with what you know, but take the time to learn about your options so that you can choose one that is the best fit.
Whether a conventional loan, an FHA loan, a USDA loan, a VA loan, a jumbo loan or something else, there are loans you may benefit from – regardless of where you want to purchase your home or what your financial situation is like.
For more information about the different types of mortgages, contact Ahmad Azizi at Option Funding, Inc. – your local mortgage lender in Westlake Village, California.
Disclaimer: Please be advised that these are just some of the mortgage options available and not an extensive list. At Option Funding, Inc., we offer a range of home loans, including bank statement loans, hard money loans, non-qm loans, refinance loans, reverse mortgages, zero down loans, and unconventional loans.