Are you thinking about buying a home, but not sure what type of loan is best for you? From 30 year and 15 year fixed-rate mortgages to 5/1 adjustable-rate mortgages, here is an explanation of the different loans available for home buyers to help you decide what the ideal one is for your specific situation. You will still need to sit down with a qualified lender to discuss your options in more detail, but it is always good to do a little homework up front. Having a general idea of what type of loans may work for you, will also help you find the right lender. Whether you are looking for a loan that requires a smaller down payment, or one with the lowest possible interest rate, the following information should help you better understand which mortgage is best for you!
Fixed-Rate vs. Adjustable-Rate Mortgage (ARM)
A fixed-rate mortgage will have the same interest rate for the life of the loan while an adjustable-rate loan, also referred to as an ARM, will have a low initial interest rate, for a set number of years (usually 5 years). Then, the rate will increase annually.
30 Year vs. 15 Year Fixed-Rate Mortgage
Traditionally, the 30 year fixed-rate mortgage is the most common loan type home owners select. This loan will provide you with the lowest monthly payment while also guaranteeing a set interest rate that will never increase. A 15 year fixed-rate mortgage will have a higher monthly payment, but a lower interest rate, so a larger portion of your monthly payment will actually go towards the principle balance of the loan rather than on interest. You will also pay off your loan in half the amount of time.
This is an adjustable-rate mortgage which provides a low interest rate for the first 5 years of the loan after which the interest rate increases on an annual basis. This type of loan is typically best suited for home buyers who either plan on moving again within in the next 5 years, or plan to pay off their mortgage within that time period.
A type of home loan insured by the government in the event the borrower defaults on their loan. These loans are the most common loans for first time home buyers because they have the lowest credit score requirements. With a 500 FICO score, you can obtain an FHA loan with 10% down. With a FICO score of 580+, you will only need 3.5% down to obtain the loan. Furthermore, you may qualify for first-time home buyer down payment assistance and grants. One drawback to an FHA loan is the mortgage insurance premium or MIP which is a fee that is about .85% of the loan amount annually. This FHA MIP fee will have an impact on your monthly payment.
These are government insured loans available for veterans and, in many cases, the spouses of deceased veterans who died in service or as a result of service related injuries or illnesses. To qualify for a VA loan, you must first obtain a certificate of eligibility. If you qualify for a VA loan, it is a great way to go since you can obtain 100% financing, which means no down payment; and, there is no mortgage insurance, which will save you thousands of dollars over the years.
These are government insured loans offered through the U.S. Department of Agriculture to those buying a home in a rural area of the country. However, despite what you might think, over 95% of the U.S is eligible. To obtain a USDA loan, you need a minimum credit score of 640.
FHA 203k Rehab Loans
Whereas regular FHA loans require the home being purchased to be in livable condition, not in need of major repairs, this type of loan allows you to obtain a loan to purchase your home as well as pay for some of the necessary repairs and renovations needed. However, you must have around 640+ credit score, and at least 3.5% down to qualify.
Conforming loans meet the guidelines of Fannie Mae and Freddie Mac, are offered by private lenders, and are not insured by the Federal government. Even though they still require mortgage insurance, this fee is typically around .5%, which is lower than for FHA loans. You also need about a 620 – 640 credit score and a down payment of anywhere between 5% – 20% to qualify. However, if you put less than 20% down, the mortgage insurance cancels once the LTV (loan-to-value) reaches 78%, and if you do put 20% down, the mortgage insurance is not required at all. Anyone looking to buy an investment property, and does not intend to live in the home, will be required to get a conventional (conforming) loan.
Conventional 97 Loan:
Similar to the regular conventional loan, but only requiring a 3% down payment (a 97% LTV).
A loan that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. Conforming loan limits for most of the country is $424,100, but goes up to $635,050 in some areas.
Jumbo Loans: Require a credit score of 680+ and usually between 15% – 20% down. These loans offer amounts up to about 1 million dollars.
Super Jumbo Loans: For loans of about 1 million to about 3 million dollars. These loans require excellent credit scores and high down payments.
This loan is an option for those who wish to purchase a new home before selling their previous one. It allows you to wrap your current and new mortgage into one payment; and, once your home is sold, you pay off that mortgage and refinance. This type of loan requires excellent credit and a low debt-to-income ratio. Furthermore, you cannot finance more than 80% of both homes’ combined value.