Buying a home is an exciting experience and is a process with many steps involved. The first and most important step to buying a home is qualifying for a home loan/mortgage through a lender also known as a mortgage broker. There are three main types of home loans as well as specialty home loans available for homebuyers. Each type of home of loan has its benefits for homebuyers and in this blog, we will break down the available types of home loan. The three main types of home loans homebuyers may already know of are Conventional, FHA, and VA. There are other types of home loans available for homebuyers that a knowledgeable mortgage broker can assist you within qualifying for. Each type of home loan is furthered explained below.
Fixed Rate Vs Adjustable Arm Mortgage (ARM)
One of the first choices in determining which kind of home loan that best fits your financial needs is whether your mortgage will have a fixed interest rate or have an adjustable interest rate determined.
Fixed Rate Mortgage – A fixed-rate mortgage will have the same interest rate throughout the entire life of the loan. A fixed-rate mortgage is available in either a 15-year loan or a 30-year loan. A 30-year fixed rate mortgage is the most common home loan homebuyers choose. This type of loan will have the lowest monthly payment and the interest rate stays the same throughout the life of the loan. A 15-year fixed rate mortgage will have a higher monthly payment, where more of your payments go to the principal of the loan rather than the interest. Sometimes, a 15-year mortgage can up to a 1% lower interest rate than a 30-year loan.
Adjustable Rate Mortgage (ARM) – An adjustable rate mortgage is a type of home loan where the interest on the loan can change during the life of the loan. Adjustable rate mortgages will typically have a lower interest rate for the first 5 years, with the interests typically rising each year. An adjustable rate mortgage is also known as a “hybrid” loan because of the fixed interest rate at the beginning of the loan and the interest changing each year from there. For example, a 5/1ARM loan has a fixed rate for the first 5 years and then each year after that, the interest rate will adjust – usually resulting in a higher interest rate.
Government-Insured Loans vs. Conventional Loans
There are two main types of home loans available for homebuyers: a conventional loan or a government-insured loan (FHA/VA/USDA). Each type of loan has its benefits and are further explained below.
Conventional Home Loan – A conventional home loan is not insured or guaranteed by the federal government but instead, are offered by private lenders. Conventional loans are also known as conforming loans because they meet the guidelines of Freddie Mac and Fannie Mae. A conventional loan is the most commonly used loan. Homebuyers can typically obtain a conventional loan for a little as 10% down with good credit. A homebuyer will still need to have PMI (private mortgage insurance) if their loan has a loan-to-value ratio above 80%, however, the PMI can tend to be lower than government-insured loans.
FHA Home Loan – The Federal Housing Administration (FHA) mortgage is a home loan available to everyone. This is a great loan for those homebuyers who cannot afford a 5%-20% down payment. The down payment on FHA loans are 3.5% and do not require as high as a credit score as a conventional home loan. Typically an FHA home loan will have an interest rate a little higher than a conventional. FHA loans require PMI insurance because the loan-to-value ratio is higher than 80% which will increase the size of your monthly payment until the loan-to-value is less than 80%.
VA Loans – The U.S. Department of Veterans Affairs (VA) offers a loan program for all of our military services members and their families. The government guarantees the lender from borrow default if any such occurs. This is important to lenders because VA loans provide borrowers 100% financing of the purchase of their home, which means 0% down payment for the borrower. In addition to homebuyers not needing a down payment, PMI is also not required for borrowers.
USDA Rural Housing Loan – A USDA Rural Housing Loan is a home loan that can only be used in designated areas and towns. This type of home loan does not require a down payment mortgage and has low mortgage insurance fees. This type of home loan is offered to “rural residents who have a steady, low or modest income, and yet are unable to obtain adequate housing through conventional financing.” This USDA eligibility map shows over 95% of the U.S. is eligible for this loan so be sure to check with your mortgage broker if this type of loan works for the new home you would like to purchase.
203k Rehab Loan – FHA 203(k) loan is a type of loan to help homebuyers with buying homes that need to be renovated. Typical FHA loans require homes to be in livable condition and not in need of repairs, but with this type of loan, homebuyers can buy a “fixer-upper” and get the money to make those repairs. This renovation loan is ideal for homebuyers who have a good credit and desire to turn a fixer-upper property into their dream home.