Types of Mortgage Loans Available to Home buyers

Figuring out the types of mortgage loans available to home buyers can be a huge hurdle. With a million differing requirements, loan types, and lender options it’s no wonder most homeowners get burned out with the home buying process. 

Finding the right type of mortgage loans for home buyers requires expert mortgage advisors certified to work with borrowers with differing needs. The good news is Lendevity understands how frustrating the process can be. Learn more about who we are and our mission here. 

That’s why we strive to getting mortgage loans for home buyers process as effortless as possible for our clients. With over 18 years of expert home loan experience, we know the ins and outs of the industry. We ensure we get the home mortgage loan that fits your unique set of circumstances. 

This post will help you learn the different mortgage loans you may qualify for. Keep reading to learn which mortgage loan may be right for you. 

In this guide, you will learn about:

1. Conventional Loans 
2. Government-Backed Loans
3. Fixed-Rate Loans
4. Adjustable-Rate Loans
5. Other Mortgage Loans

Conventional Mortgage Loans 

Conventional loans are types of mortgage loans for home buyers that the federal government doesn’t back. These loans are available to you as a homebuyer from private lenders including banks, mortgage firms, and credit unions. 

There are two main Conventional Loan types: Conforming and Non-Conforming. Let’s dive into the differences between these loan types.

Conforming Conventional Mortgage Loans

The Federal Housing Finance Agency (FHFA) sets annual baseline loan limits for single-family properties. The Housing Price Index (HPI) report determines and adjusts the limit every year to reflect the average increase of home prices nationally.

Check out this year’s conforming loan limit here

Although government does not back conventional loans, conforming conventional loans must meet loan standards set by the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). These agencies guarantee conventional loan mortgages. This means they offer stability, liquidity, and affordability needed in the housing market. 

Conforming conventional loans are typically easier to qualify for than other types of mortgage loans. Thus, making them a great option for first-time home buyers.

Consider these factors before seeking a conforming conventional loan:

1. Credit scores are an important component of every loan experience. Make sure your credit score is at least 620 before considering a conforming conventional loan. 
2. Ensure your Debt-to-Income ratio (DTI) is less than 50%. This is a measure of how much of your monthly income goes to paying off debts. If it’s more than 50%, consider paying off some debt before seeking a mortgage loan.
3. Confirm the loan you’re applying for falls within the loan limit standards set by Freddie Mac and Fannie Mae.

Non-Conforming Mortgage Loans

The name of this type of conventional loan says it all – Non-conforming Conventional Loans do not conform to the loan limits set by the FHFA. These types of mortgage loans may use underwriting standards that do not fit the guidance set by Freddie Mac and Fannie Mae and therefore are not guaranteed by these agencies. 

Jumbo loans are the most common Non-Conforming loans. Jumbo loan values vary widely by your location. For example, the FHFA sets annual home loan limits nationally, but these loan limits may increase for counties that have much higher home values. 

Non-conforming loans are inherently more risky than conforming loans because they:

• Exceed loan limit standards set by the FHFA
• Are not guaranteed by Freddie Mac or Fannie Mae
• Involve more money 

Having said all this, you should consider these factors before seeking a non-conforming conventional loan:

1. Because non-conforming loans carry more credit risk, you must ensure your credit score is 700 or above. 
2. Ensure your Debt-to-Income (DTI) ratio is less than 43%. Industry experts prefer to see this number even lower, at around 35%, before approving a non-conforming loan.
3. Save enough money to pay the down payment. Applicants for non-conforming loans must adhere to strict income and asset requirements. Traditionally, jumbo loans required a 30% down payment. While those requirements have loosened, the down payment is determined by a wide range of factors. It could be more or less than 30%. 

Government-Backed Mortgage Loan

There are three main types of government-backed mortgage loans you can apply for as a potential homebuyer: Federal Housing Administration loans, United States Department of Agriculture loans, and Department of Veterans Affairs loans. 

As their names suggest, Federal government agencies insure these loans. Because these agencies back the loans, they protect you as the lender in the event you cannot pay the loan. This significantly reduces the risk for you as the lender. You should be aware of certain requirements that differ from conventional loans.

Let’s dive into each government-backed loan to see specific requirements you may need to follow:

Feral Housing Administration Loans

Available to homebuyers since 1934, these types of mortgage loans for home buyers are accessible to most first-time homebuyers because they have looser income, credit, and down payment requirements. Unlike the other two government-backed loan types, FHA loans do not require homebuyers to be active military members or purchase a home in a particular location. 

The same lenders issue FHA loans as conforming loans – banks, private mortgage firms, and credit unions. 

Consider these factors before seeking an FHA loan:

1. Ensure your credit score is 580 or higher. If your credit score is lower than this, you may still qualify for an FHA loan, but you may need to pay up to a 10% down payment.
2. You have enough money saved to pay a 3.5% down payment. 
3. Private Mortgage Insurance (PMI) is typically a requirement for FHA loans and usually requires you to pay an upfront fee of 1.75% of your home loan value plus an annual premium that can vary from 0.45% to 1.05%.

U.S. Department of Agriculture Loans

Loans offered by USDA are backed by the agency’s Rural Development Guaranteed Housing Development Program and come with a strict set of requirements to be approved. 

USDA-backed loans are available to low or moderate-income homebuyers looking to purchase a home in eligible rural or suburban areas as determined by the agency. If you fall into this category of homebuyer, then the good news is there are typically no down payment requirements to satisfy. 

While this is good news, you should still consider the following requirements before seeing a USDA-backed mortgage loan:

1. While there are no set credit score requirements, most lenders will look to a credit score of 640 or higher. 
2. Private Mortgage Insurance (PMI) is typically a requirement for USDA loans and requires you to pay an upfront fee of 1% of your home loan value plus an annual premium of 0.35%

U.S. Department of Veterans Affairs Loans

The Department of Veterans Affairs offers VA-backed loans to active duty service members, veteran service members, eligible spouses of a veteran, and World War II allied veterans. These government-backed loans come with attractive and less stringent credit, income, and down payment requirements. 

Before applying for a VA-backed home loan, consider the following:

1. Work with an expert lender, like Lendevity, to prepare all necessary documentation. 
2. Consider the home types you are allowed to purchase with a VA loan. Some housing types, like condos and manufactured homes, are not approved by all lenders. Make sure you confirm with your lender.
3. Save enough money to pay the upfront lending fee, which ranges from 1.4% to 3.6% of the loan amount. 

Fixed-Rate Mortgage Loan

A fixed-rate loan is a conventional loan that offers a fixed rate of interest for the duration of the loan. There are two types of fixed-rate loans: 30-year fixed-rate loans and 15-year fixed-rate loans. 

As the names suggest, these fixed-rate loans set the interest rate at a fixed rate for 30 years or 15 years. Because your lender calculates your loan payment to include the interest rate, this type of loan locks in your monthly loan payment and your interest payment for the duration of your loan. 

Fixed-rate loans stabilize your interest rates and typically reduce your loan balance, but be aware that 15-year loans may come with a lower interest rate but need to repay in a shorter window of time, increasing monthly payments. 

Some things to consider before seeking a fixed rate home loan:

• Consistent and stable monthly payments – you always know what you owe.
• Know exactly how much you’ll pay over the course of the loan with your set interest rate.
• As one of the more popular mortgage loan options, you may have an easier time applying and being approved by your lender. 

Adjustable-Rate Mortgage Loan

Adjustable-rate mortgages (ARMs) rely on variable interest rates. This means a lender may approve your mortgage at a lower interest rate that slowly rises for the loan duration. An adjustable-rate mortgage interest rate is typically lower than a fixed-rate mortgage. Thus, making it a great choice for homebuyers looking to pay less money upfront. 

There is a wide variety of ARMs that may be right for you. Schedule a call to talk with us today. We’ll walk you through your ARM options, including:

• 5/1 and 5/6 ARMs – provide a 5-year fixed-rate mortgage that adjusts interest rates every year or every 6 months after those first 5 years. 
• 7/1 and 7/6 ARMs – provide a 7-year fixed-rate mortgage that adjusts interest rates every year or every 6 months after those first 7 years. 
• 10/1 and 10/6 ARMs – provide a 10-year fixed-rate mortgage that adjusts interest rates every year or every 6 months after those first 10 years. 

Other Types of Mortgage Loans to Consider

Now that we’ve covered the most common types of mortgage loans, let’s look into some more uncommon loans. While these loans may not fit everyone’s needs, they still offer certain benefits that you may want to consider before speaking to a lender about a mortgage home loan. 

Construction Loans

These short-term loans can be the right choice for buyers looking to cover the costs of their new custom construction home. Before pulling the trigger on this type of loan, keep in mind you will need to apply for a mortgage home loan once the construction is complete. 

Balloon Loans 

While you can apply these loans to many types of financing, mortgage borrowers need to pay a lump sum amount at the end of the loan period. Your lender can include principal and interest payments in a balloon mortgage loan, which leaves you with a lower lump-sum payment. Because a lender can customize this loan on a borrower’s unique needs, borrowers should carefully consider whether this loan is the right fit.  

Interest-Only Loans

These loans allow borrowers to pay only the interest payment for a set amount of time. It is typically the first 5 or 10 years of the loan. Because interest-only mortgage loans can be fixed-rate or adjustable-rate, it’s important to talk with your lender about what the right option is for you. 

Piggyback Mortgage Loans

Piggyback mortgage loans allow a borrower to apply for two mortgages in order to avoid paying Private Mortgage Insurance (PMI) and large interest rates. These loans even allow for a smaller down payment requirement. This can be a good strategy for interested borrowers in applying for a jumbo loan or other non-conforming loans. 

Reverse Mortgage Loans

Reverse mortgage loans are a great fit for borrowers aged 62 years or older who have paid off their mortgage. These types of loans allow borrowers to withdraw a certain amount of tax-free equity from their existing home without the burden of repayment until they sell the home or the borrower dies. 

As a borrower, you have many options to fit your particular needs when it comes to mortgage loans. From conforming loans to government-backed, there is a loan for every borrower. 

If you’re ready to take the next step in your home buying journey, reach out to Lendeivty today. 

We match you with the perfect lender to guide you through the entire process, from loan selection to closing on your home. We are committed to getting our customers the best deal, terms, and home buying experience.

Get started with Lendevity today!