Purchasing a home is likely the most expensive investment you’ll ever make. With countless mortgage products out there, it can feel totally overwhelming trying to pick the ideal home loan for your situation.
This comprehensive guide breaks down 15 different types of mortgages—from conventional financing to specialized options—so you can make a well-informed decision when it’s time to get a home loan. Let’s dive in!
Conventional Loans: The Most Popular Home Financing
Conventional mortgages issued by private lenders like banks and credit unions are the most common loans for home buyers. They adhere to underwriting guidelines established by Fannie Mae and Freddie Mac.
Unlike government-backed loans, conventional mortgages are not insured or guaranteed by any federal agencies. However, they meet the standards to be sold to the GSEs Fannie and Freddie.
Here’s what to expect with a conventional home loan:
Credit Score Requirements: You’ll generally need a minimum credit score of 620 for approval. The higher your scores, the better your loan terms and rates.
Down Payments: Typically you must make a down payment of 10-20% of the purchase price. Programs exist allowing less.
Mortgage Insurance: If your down payment is under 20%, you’ll have to pay private mortgage insurance (PMI) until you reach that 20% equity threshold.
The main advantages of conventional loans are competitive interest rates, flexible terms, and predictable payments with fixed-rate mortgages. Drawbacks are the stricter eligibility requirements compared to government-backed financing.
Government-Backed Loans: Making Homeownership Affordable
Government agencies like the FHA, VA, and USDA offer specialized mortgage programs to help eligible home buyers afford the purchasing process.
FHA Loans
FHA loans are insured by the Federal Housing Administration. Key features include:
Down payments as low as 3.5%
Lenient credit requirements - minimum 580 FICO score
Funds gifted for down payment
Lower mortgage insurance premiums than conventional loans
The big trade-off is you’ll pay mortgage insurance for the entire loan term with FHA financing.
VA Loans
VA loans help military members, veterans, and surviving spouses finance home purchases with no down payment required.
Other VA loan benefits include:
No monthly mortgage insurance premiums
More flexible credit guidelines
Ability to roll closing costs into loan amount
VA loans do charge a one-time funding fee, which varies based on your down payment and service status.
USDA Loans
USDA home loans assist low-to-moderate income home buyers in eligible rural and suburban locales buy homes with no down payment and flexible credit standards. You can also potentially get closing costs and repairs financed.
Jumbo Loans: For Purchasing High-End Homes
Jumbo mortgages are for luxury properties that exceed conforming loan limits imposed by the Federal Housing Finance Agency. Jumbo loan limits fluctuate annually and by county, typically starting between $647,200 to $970,800.
Because they exceed the limits and are viewed as higher risk, jumbo loans have stricter requirements:
Excellent credit - 700+ FICO scores
Higher down payments, usually 10-20%
Lower debt-to-income ratios
While they have higher standards, jumbo loans allow buyers to purchase more expensive properties. You’ll also likely get lower interest rates than with conforming loans.
Choosing Between a Fixed or Adjustable Interest Rate
Aside from loan types, a major decision is whether to opt for a fixed or adjustable interest rate on your mortgage. Each option has unique pros and cons.
Fixed-Rate Mortgage Benefits
Fixed-rate mortgages lock in an interest rate for the full loan term, typically 15 or 30 years. Because the rate never changes, your monthly payments remain consistent, providing stability.
Rates for fixed mortgages closely track the bond market. When bond yields rise, home loan rates also go up, and vice versa. Refinancing can make sense if rates fall substantially to secure a lower rate.
Adjustable-Rate Mortgage Features
With adjustable-rate mortgages (ARMs), you start with an introductory interest rate, which remains fixed for a set period of 3, 5, 7 or even 10 years. Afterward, the rate begins fluctuating based on an index like US Treasury securities.
ARMs can make sense if you plan to move before the adjustment timeframe. You’ll pay a lower rate initially compared to fixed mortgages. Just know payments can significantly increase once the rate starts adjusting if index levels rise.
Specialized Mortgages for Unique Home Buying Needs
Beyond conventional and government-backed loans, specialized mortgage programs exist to finance unique home purchasing and remodeling situations.
FHA 203(k) Renovation Loans
FHA 203(k) loans allow you to combine a mortgage with funds to renovate a home into one loan. You must use a 203(k) approved lender and set renovation budgets upfront.
HomeStyle Renovation Mortgages
Similar to 203(k) loans, Fannie Mae’s HomeStyle program lets buyers finance home purchases together with renovations using a conventional loan. HomeStyle offers higher loan limits and flexible rehab options.
Bridge Loans
Bridge loans provide short-term financing so you can secure your new home before selling your existing one. They “bridge the gap” between closings.
Land and Construction Loans
Construction loans help fund building a custom home on vacant land you purchase. The lender disburses funds in stages based on completed work until you can get permanent financing.
How to Choose the Best Mortgage for Your Situation
With so many loan products out there, it can feel overwhelming to decide what mortgage works for your unique circumstances and goals. Here are some key questions to ask yourself to determine the ideal home loan:
What’s your budget? Calculate your total monthly debts along with income and down payment funds saved to determine how much home you can realistically afford.
What’s your credit history? Your credit scores and reports dictate what loans you’ll qualify for. Get your credit in good shape before applying.
How long will you stay put? Opt for a fixed-rate mortgage if you plan to live in the home for many years. An adjustable-rate option could work for a shorter duration.
What are your goals? Do you need to finance renovations? Or tap home equity for other costs? Identify your top priorities.
Have you compared rates? Be sure to shop and compare loan rates and fees across multiple lenders to help find the most competitive deal.
Choosing the Right Home Loan Is Key to Homeownership
Determining the ideal mortgage product that matches your financial situation, credit profile, plans, and goals is crucial to make homeownership affordable. Conventional loans work for many buyers who can qualify. Government programs expand access for eligible buyers. And specialized loans accommodate unique needs like renovations.
Use this comprehensive guide to familiarize yourself with the array of mortgage options at your disposal. Identify your must-have features, shop multiple lenders, and select the home loan that best positions you for owning your dream home. The right financing could be key to turning your property aspirations into reality!
Frequently Asked Questions About Home Loans
Purchasing a home is one of the biggest financial decisions you can make. It also comes with plenty of questions about the ideal mortgage products and loan process. This FAQ covers common queries home buyers have when it comes to home loans.
What are the different types of mortgages available?
There are many mortgage varieties available, including:
- Conventional loans from private lenders like banks
- FHA loans with low down payments insured by the government
- VA loans for veterans and service members with no down payment
- USDA loans for low-income buyers in rural areas
- Jumbo loans for luxury homes above conforming limits
- Fixed-rate mortgages for predictable payments
- Adjustable-rate mortgages (ARMs) with interest rates that fluctuate
- Specialized loans like renovation and bridge financing
What credit score do I need to qualify for a mortgage?
Requirements vary by loan type, but in general you’ll need a minimum credit score of 580-620 for government-backed mortgages and a 620+ score for conventional loans. The higher your scores, the better your loan terms and interest rates will be.
How much down payment is required for a home loan?
Down payment requirements depend on the loan program, but some typical ranges are:
- Conventional: 10-20%
- FHA: 3.5%
- VA & USDA: 0%
- Jumbo: 10-20%+
Come prepared with at least 10-20% for a down payment for the best mortgage rates and terms.