If you are shopping for a home and you are not paying cash, chances are you are shopping for mortgage loans, as well. It is important to know that every mortgage loan has its benefits, and there is no such thing as a mortgage that suits everyone’s needs. There are many variables that can influence the type of mortgage loan you take out, as well as the amount you will be approved for (ie. you plan to move, how long you plan on staying at the property). Some may require a certain downpayment, have specific standards for the loan amount, or may require mortgage insurance, so you must do your research to see what loan best suits you and your needs.
For starters, there are two types of loans: conventional and unconventional. Conventional loans are defined to be any type of loan that is not backed by a government agency, such as the Federal Housing Administration or the United States Department of Veterans Affairs. These loans usually meet the downpayment and income requirements set forth by Fannie Mae and Freddie Mac. Conventional loans oftentimes require a higher credit score, lower debt-to-income ration, and a larger downpayment.
Borrowers cannot always meet these requirements, which is where unconventional loans might be more appealing. Unconventional loans are loans that are backed by the government or secured through a bank or private lender and are ideal for those with a lower income and less than average credit.
Now let’s take a deeper dive into the types of loans within conventional and unconventional loans:
Conventional Loans
Fixed-Rate:
Just like the name suggests, fixed-rate loans are loans whose interest rate never changes during your repayment term, no matter if your property taxes or homeowner’s premium increase. However, interest rates for fixed-rate loans are usually higher than adjustable-rate loans. But if you have a taste for consistency and aren’t planning on moving anytime soon, this loan is a good option.
Adjustable-Rate:
Unlike fixed-rate loans, the rate on the adjustable-rate loan changes based on market interest rates. They typically start with lower interest rates, so your monthly payments will be more affordable and later increase depending on the market.
This loan works well if you have a lower credit score because those with lower credit scores typically will not be able to get affordable rates with a fixed loan. Adjustable-rate loans are also beneficial to those who do not plan on staying on the property for long, making it easier for these people to have access to a short term loan with better rates.
Unconventional Loans
Federal Housing Administration (FHA) Loan:
Contrary to popular belief, FHA loans are open and are available to all buyers, not only first time home buyers. FHA loans are backed by the government and managed by the Department of Housing and Urban Development (HUD). These types of loans are very popular, because of their low downpayment requirement of 3.5% of the sale price. Borrowers must have a minimum credit score of 500 and are also required to pay mortgage insurance—which compensates the lender or investor in case of a default. If you meet all of the requirements and wish to put a small downpayment, FHA loans are a great option.
Veterans Affairs Loan:
If you have served in the military or have family members who have, the U.S. Department of Veterans Affairs offers a loan service that is guaranteed by the federal government. A major advantage of VA loans is that borrowers may be eligible to receive 100% financing, meaning no downpayment is required.
Your mortgage purchase is just as important as your home purchase so it is very important to make sure you thoroughly review your options so you can put yourself in the best financial position.