What Are the Most Common Mortgage Types?
Not all mortgage loans are created equal. Before getting pre-approved for a home loan, it is important to understand the differences between the various mortgage loan products and determine which type of loan is best for you and your financial goals and needs.
Different mortgage products will come with different credit requirements, down payment requirements, mortgage insurance requirements, and benefits.
Common Types of Mortgage Loans
There are several types of mortgage loans and different programs that offer each type of loan. The most commPreview (opens in a new tab)on types of mortgage loans are conventional loans, jumbo loans, government-backed loans, fixed-rate mortgages, and adjustable-rate mortgages.
Conventional loans are the optimal choice for borrowers with a good credit score. A conventional loan is not backed by the federal government and can be either a conforming loan or non-conforming.
Conventional loans can be used to purchase a primary home, second home, or investment property. The borrowing costs for a conventional loan tend to be lower compared to government-backed loans, even though the mortgage rates for conventional loans tend to be higher.
Conforming Conventional Loan
A conforming conventional loan “conforms” to the standards set by the Federal Housing Finance Agency (FHFA), which means it has certain standards borrowers must meet in terms of credit, debt, and loan size. In 2022, the conforming loan limits are $647,200 in most areas and $970,800 in areas where the cost of living is higher.
Non-Conforming Conventional Loan
A non-conforming conventional loan is a loan that does not “conform” to the standards set by the Federal Housing Finance Agency. These loans are often marketed to borrowers who want to purchase larger more expensive homes, borrowers whose credit scores do not meet the FHFA standards, or borrowers who are recovering from an extreme financial crisis, like bankruptcy.
Conventional Loan Requirements
The down payment requirement for a conventional loan can be as low as 3% of the mortgage loan amount, for loans backed by Fannie Mae or Freddie Mac (the Federal Housing Finance Agency). However, the borrower will be required to pay PMI (private mortgage insurance) unless they make a down payment of 20% or higher.
Sellers have the option of contributing to closing costs with a conventional loan, which can alleviate some of the financial burdens of closing costs from the borrower. To qualify for a conventional loan, a borrower must have a minimum FICO score of 620 or higher and a debt-to-income ratio of 43% (with a higher down payment, the DTI can be as high as 50%).
If your credit score is good and you have the funds to make a significant down payment, a conventional loan is most likely the best option for you. The 30-year fixed-rate conventional mortgage is the most common mortgage loan for homebuyers.
As their name implies, jumbo mortgage loans are loans that do not meet the FHFA loan limits. These types of loans are common in areas with higher costs of living, especially in big cities like Los Angeles, San Francisco, New York City, and Hawaii.
Jumbo loans are a good option for someone looking to purchase a more expensive home that exceeds the conforming loan limits. The interest rates on jumbo loans are typically comparable with conventional loans.
Jumbo Loan Requirements
To qualify for a jumbo loan, a borrower must have a FICO score of 700, a debt-to-income (DTI) no higher than 45%, must have sizable assets in cash or savings, and must make a down payment of at least 10% to 20% of the mortgage loan amount. Jumbo loans also typically require more documentation to qualify as well.
At this time, VeteransLoans.com does not offer jumbo loan products.
The United States government is not a mortgage lender, but it has established several programs that guarantee loans and make homeownership feasible for more Americans. There are three government agencies that back mortgages, the Federal Housing Administration (FHA loans), the U.S. Department of Agriculture (USDA loans), and the U.S. Department of Veterans Affairs (VA loans).
Government-backed loans are good options for borrowers who do not necessarily qualify for a conventional loan due to low credit or lack of funds for a larger down payment. Government-backed loans cannot be used for an investment property and the borrower must live in the purchase property.
FHA loans are backed by the Federal Housing Administration and are designed for borrowers who do not have excellent credit and cannot make a sizable down payment. To qualify for an FHA loan, borrowers must have a minimum FICO score of 580 and a 3.5% down payment.
A FICO score of 500 is acceptable with a 10% down payment. FHA loans require two mortgage insurance premiums, which can make the mortgage overall more expensive compared to other types of mortgages. Sellers are allowed to contribute to closing costs with an FHA loan.
Another advantage of FHA loans is there is an FHA down payment assistance grant for eligible borrowers.
The loan limits for FHA loans tend to be lower than conventional mortgages, which could limit the available inventory. FHA loans also come with mandatory mortgage insurance premiums that can only be canceled if the FHA loan is refinanced into a conventional mortgage.
USDA loans are backed by the United States Department of Agriculture and are designed to make homeownership feasible for borrowers with moderate- to low-income in rural areas. To qualify for a USDA loan, borrowers must purchase a home in a USDA-eligible area and must have an income that does not exceed the local median income.
USDA loans typically do not require a down payment for eligible borrowers but do require an annual fee and an upfront fee of 1% of the loan amount (this can be financed into the mortgage loan). At this time, VeteransLoans.com does not offer USDA loan products.
VA loans are backed by the United States Department of Veterans Affairs and are designed to help members of the U.S. military (active duty and veterans) achieve homeownership with flexible, low-interest mortgage loans. VA loans do not require any down payment and do not have loan limits.
This means borrowers are not restricted by the FHFA loan limits in terms of how much they can borrow. A debt-to-income ratio of 50% or less and a minimum FICO score of 620 are typically required for VA loans, though this can vary from lender to lender.
VA loans do not require mortgage insurance but do charge a funding fee, a percentage of the mortgage loan amount, which can be rolled into the mortgage or paid upfront.
Fixed-rate mortgages are mortgage loans where the mortgage interest rate does not change over the life of the loan. Fixed-rate mortgages typically have a term of 15 or 30 years. Some lenders allow borrowers to choose any term between eight and 30 years.
The greatest advantage of a fixed-rate mortgage is that the monthly principal and interest payments do not change over the life of the loan, which allows more accurate budgeting for borrowers. The interest rates on fixed-rate mortgages are typically higher than on adjustable-rate mortgages (ARMs). 30-year fixed-rate mortgages are the most common type of mortgage.
Borrowers who intend to live in their home for five to seven years and want the stability of monthly mortgage payments that do not change should consider a fixed-rate mortgage.
Adjustable-rate Mortgage (ARM)
The adjustable-rate mortgage (ARM) is a mortgage loan with an interest rate that fluctuates with the housing market conditions. Most ARM products have a fixed mortgage rate for a few years before the rate shifts into a variable interest rate for the remaining loan term. For example, a 7-year/6-month ARM means that the rate will be fixed for the first seven years and then will adjust every 6 months after the initial seven years.
Adjustable-rate mortgages typically offer lower interest rates compared to other types of loans, for the first seven years. These types of loans are good for homeowners who do not plan to live in their home for more than a few years and intend to sell their home before the initial fixed-rate period has concluded.
Contact a Loan Specialist
Are you ready to get pre-approved for a home loan? VeteransLoans.com offers conventional, FHA, and VA mortgage loan products. The loan specialists at VeteransLoans.com can determine your eligibility and get you pre-approved in a matter of minutes! Call 1 (888) 232-1428 to speak with a loan specialist today.