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7 types of mortgage loans: Which one is best for me?

Whether you’re a first-time homebuyer or a seasoned house flipper, you might come across multiple types of mortgage loans as you consider buying a home. Understanding the six most common types of home loans, and what options they may offer you, may be very useful as you negotiate your way through one of your more complex purchases.

When you’re looking to buy a home, you have financing options.

Mortgages come in all shapes and sizes. While the 30-year fixed-rate mortgage might be the most traditional, it’s far from the only choice you have. Your lenders will ask you questions about your income, credit and the type of home you’d like to buy. And they’ll use that information to recommend types of loans that would work best for you.

We’ll go over six of the most common types of mortgage loans on the market and discuss a few other important considerations — like what loan term you need and whether a fixed or adjustable interest rate makes more sense for your loan. Let’s dive in.

If you have good credit and a stable income, chances are your lender will first see if you qualify for a conventional loan. Considered a basic mortgage loan, a conventional loan simply refers to a mortgage that comes from a private lender like a bank and isn’t backed or insured by a government program. Conventional loans can be “conforming,” the most common loan type, or “nonconforming.”

The difference mostly comes down to the size of the mortgage you’re trying to get. Conforming loans have maximum amounts set by the government — $647,200 in most counties (in 2022) — and are designed to be sold to Fannie Mae and Freddie Mac. These government-sponsored entities set other rules and guidelines for the mortgages, including a minimum credit score of 620 in most cases and a minimum down payment of 3% for some qualified borrowers.

Nonconforming loans include jumbo mortgages (which we’ll discuss later), as well as loans that don’t fall into another mortgage category. These can be designed for people with poor credit or wealthy individuals with unusual financial circumstances.

Best for

Conventional loans are best for people with good credit who are looking for what are typically the lowest interest rates and a less complicated application process. These loans tend to cost less than most other types of home loans, like Federal Housing Administration loans — so long as you qualify.

Things to watch out for

If you have less-than-stellar credit, you might have trouble qualifying for a conventional loan. Also be aware that if you put down less than 20%, you’ll usually need to buy private mortgage insurance, which will add to your total loan cost.

If you’re concerned you may not qualify for a conventional loan, an FHA loan could be an option.

Because FHA loans are mortgages made by private lenders but insured by the Federal Housing Administration, the government guarantee may help you qualify for a mortgage you may not have been able to get otherwise.

But it’s important to know that not all applicants will be approved, and you might be required to make a 10% down payment if your credit score is between 500 and 579. With credit scores of 580 or higher, you might be able to make a down payment as low as 3.5%.

While FHA loans may seem attractive, it’s important that you consider the total cost of the loan when comparing it to other options (more on that below). So, while the qualifications are more flexible, when you tally up all the costs involved, including mandatory mortgage insurance for example, FHA loans tend to be a more expensive product over the life of the loan than conventional mortgages.

Best for

FHA loans can be a great option if you can afford a monthly mortgage payment but don’t have the credit score to qualify for a traditional mortgage. They also may allow you to buy a home with a low-down payment, if you qualify.

Things to watch out for

FHA loans can be more expensive than other types of home loans because the cost of the federal government’s guarantee is passed on to you. The FHA requires you to pay for mortgage insurance on all loans through its program. This is paid in two ways — an upfront payment made as part of the closing costs and a monthly insurance premium.

The upfront mortgage premium is 1.75% of the loan amount ($3,500 for a mortgage of $200,000, for example). The monthly premium is typically 0.85% of the loan per year, or $1,700 annually for a mortgage of $200,000. Unlike with conventional loans, you’ll have to go through a complicated process to cancel mortgage insurance on an FHA loan.

If you’re a veteran or actively serving in the military, you’ll likely want to take advantage of a VA loan, if you qualify. VA loans are mortgages insured by the U.S. Department of Veterans Affairs that help service members, veterans and eligible family members buy homes. You’ll take out these mortgages through a private lender, with the federal government guaranteeing a portion of the loan.

Even with the government guarantee, you’ll still need to meet your lender’s credit and income standards to qualify for a VA loan. There’s no set minimum credit requirement, but lenders will take a thorough look at your finances to make sure you can pay back your mortgage.

Best for

If you qualify for a VA loan, they can be a great deal. In many cases, you won’t need to make any down payment at all. The VA guarantee also offers lower interest rates and better terms than you may be able to get elsewhere, especially if you have bad credit. Another plus: VA loans don’t require mortgage insurance premiums.

Things to watch out for

In order to get a VA loan, you’ll need to apply for what’s known as a “certificate of eligibility,” which provides details on your military service history. To qualify, you must have served for a certain length of time, ranging from 90 days to two years depending on when you were in the military.

If you’re buying a house in a rural area, you may want to consider a USDA loan. USDA loans refer to programs offered by the U.S. Department of Agriculture that help low- and middle-income people afford to buy homes in rural areas. These programs either lend you money directly or guarantee loans made by private lenders, depending on which you might qualify for.

You can use the direct loan program if you don’t currently have adequate housing or can’t afford traditional loans. You typically qualify only if you live in an area populated by fewer than 35,000 people. Additionally, these loans have fixed rates and don’t usually require a down payment. You’ll apply for these directly with a USDA Rural Development office.

The loan guarantee program is much more common. You’ll get these USDA loans through an approved private lender. To be eligible, you generally must make no more than 115% of your area’s median income and live in a rural area. You can search to see if your address is in a qualified area on the USDA website. You won’t have to make a down payment if you qualify.

Best for

As we mentioned, USDA loans are best for people with low and moderate incomes who live in rural areas.

Things to watch out for

You might not qualify. While there are no minimum credit score requirements, you must also be able to prove you can repay the loan. Your total monthly home payment shouldn’t exceed 29% of your monthly income.

If you’re buying an expensive home, you’ll likely need to consider a jumbo loan. A jumbo loan refers to a mortgage that’s larger than the Freddie Mac and Fannie Mae conforming loan limits ($510,400 in most areas; higher in high-cost areas). Jumbo loans typically go up to $1 million to $2 million.

Best for

Jumbo loans are best for people who need a mortgage for a significantly larger amount than the average U.S. home price or the typical home price in their area.

Things to watch out for

To get a jumbo loan, you’ll typically need to have solid credit and be able to make a sizable down payment. Keep in mind that your costs on a jumbo loan can be higher than for a typical mortgage.

A non-qualified mortgage loan is more commonly referred to as a Non-QM loan. Within the mortgage industry, a qualified home loan is one that complies with the requirements set forth by the Consumer Financial Protection Bureau (CFPB) and standards set by the federal government. These include loans sold or insured by entities such as Fannie Mae or Freddie Mac. Not every borrower fits neatly inside a traditional government matrix. Investors, foreign nationals and those who are self-employed, as well as borrowers with credit blemishes, such as foreclosures, low credit scores or prior bankruptcies, may find it difficult to qualify for a conventional loan.

That’s where a Non-QM loan can be helpful. A Non-QM loan can be the solution to help a borrower achieve the American dream of homeownership. Because these are scenarios that do not meet federal standards for qualified or traditional mortgage loans, Brokers such as United Atlantic Mortgage have access to special loan products to help more Borrowers achieve their goal of homeownership. A Non-QM loan has different underwriting guidelines than conventional or government-backed loans. Non-QM loan lending guidelines follow regulatory guidelines while considering a borrower’s Ability to Repay (ATR), according to the loan’s terms. This includes cash flow through personal or business bank accounts.

100% financing with Down Payment Assistance (DPA) is available on FHA loans for a variety of eligible borrowers—income minimums not required in all cases! Offered as a grant equal to 2% or 3.5% of the purchase price, the DPA has zero resale or repayment restrictions and can be combined with FHA 203 K Rehab loans.

Best for

With the ability to choose between 2% and 3.5%, DPA is a good option for FHA Buyers that need help with either their down payment or closing costs. With this program there are many ways to qualify, so all are invited to apply, but it is ideal for first-time homebuyers and those in or retired from qualified professions.

What to look out for

In most cases, standard FHA overlays apply; however, the allowable DTI (Debt-to-Income ratio) is lower and it cannot be used with High Balance FHA loans. Also, keep in mind that the DPA will come with a higher interest rate until the Buyer is able to refinance and the program mandates one Borrower to complete a homeownership course.

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