What Different Types Of Loans Are There – In today’s market there are many different types of mortgages that can be tailored to fit the unique needs of each buyer – from borrowers with perfect credit to low-income borrowers and borrowers with small down payments.
Not sure what type of home loan you should use? Answer a few questions below and we’ll offer you up to three loans that may fit your needs.
What Different Types Of Loans Are There
Many first-time homebuyers — and even repeat buyers — believe you need excellent credit and a 20 percent down to buy a home. But this is no longer the case.
Understanding The Different Types Of Mortgage Loans [infographic]
The best mortgage for you depends on several factors, such as your FICO score, down payment, credit history, and the type of home you want to buy. But to help you get started, here’s an overview of the 10 best home loans on the market today:
Fortunately, you are not alone when choosing a home loan. Your loan officer or mortgage broker will help you review your options when applying for pre-approval.
However, it helps to know what to look for so you can prepare and ask the right questions.
Want a head start? The mortgage calculator above will match you with up to three loan types based on your answers to a few simple questions.
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This does not guarantee that you will be approved, but it will help you understand the types of loans available and give you an idea of the minimum requirements to qualify for a mortgage.
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As the name suggests, fixed-rate mortgages specify interest rates that never change over the life of the loan. Because you have 30 years to pay off the balance, you’ll have lower monthly payments than you would with a 15-year loan.
For example, you can get a conventional loan from the Federal Housing Administration (FHA), Virginia (VA), or U.S. Department of Agriculture (USDA) with a 30-year fixed rate. The same applies to any other loan program.
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When most people think of a “standard” mortgage, they picture a traditional 30-year loan. These start at 3-5% down and require a credit score of at least 620.
Conventional mortgages are also very flexible. You can purchase a property consisting of 1-4 units, and it does not have to be your primary residence. You can also use this software for a vacation home or real estate investment.
A 15-year fixed rate mortgage works like a 30-year fixed rate mortgage. Your interest rate is fixed for the life of the loan, and your monthly payments will never change unless you choose to refinance.
A 15-year mortgage pays off for — you guessed it — 15 years. Because you’re paying off the loan in half the time, your mortgage payment will be much higher than with a 30-year loan.
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Homeowners choose a 15-year mortgage if they have good cash flow (to afford higher payments) and want to save money in the long term.
With a 15-year FRM, you’ll pay much less in interest — which could save you tens of thousands of dollars in total interest payments.
A conventional 97 loan is a conforming mortgage. This means that it complies with the lending rules set by Fannie Mae and Freddie Mac.
Because conforming loans can be purchased by Fannie or Freddie, they are less risky for mortgage lenders. This means lenders can offer favorable terms and competitive interest rates – even to borrowers without large down payments or perfect credit.
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As a result, 97 conventional loans are available at just 3 percent interest. And you only need a credit score of 620 to qualify.
Similar programs include the Fannie Mae HomeReady Loan and the Freddie Mac Home Possible Loan. Both options require a minimum down payment of 3 percent and allow for flexible income and creditworthiness.
An FHA loan is a mortgage backed by the Federal Housing Administration. This type of loan is intended for borrowers with poor credit and/or low income, who need a little extra help to qualify for a mortgage.
Because the FHA insures these loans, mortgage companies can lend to borrowers with imperfect credit without taking on as much risk.
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With this support, you can get an FHA loan with a FICO score of just 580. You only need a down payment of 3.5%.
Furthermore, FHA lenders are a little more flexible about your debt-to-income (DTI) ratio. So, if you already have a lot of debt — perhaps from student loans or car loans — it may be easier for you to qualify for a mortgage through the FHA program.
Like the FHA mortgage program, FHA 203k loans are backed by the Federal Housing Administration. But the 203k loan is designed for buyers who want to purchase a fixer-upper home.
With an FHA 203k mortgage, you can finance the costs of purchasing and repairing your home at the same time. This gives you one low-interest loan and just one monthly payment instead of taking out separate loans to pay for the home purchase and renovation.
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The 203k program has many of the same requirements as a standard FHA mortgage. In most cases, you only need a 3.5 percent down payment and a credit score of 580 to qualify.
However, remember that the mortgage process will take a little longer because your lender needs to approve your renovation plans and cost estimates when underwriting the loan.
Interest rates are low, there is no private mortgage insurance (PMI), and best of all, no down payment is required. Qualified VA homebuyers can purchase properties for $0.
Just note that the VA requires a one-time financing fee. This can be paid up front or added to your loan balance.
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USDA loans, like VA loans, require no down payment. They also have below-market mortgage rates and affordable mortgage insurance.
To qualify for this program, you must purchase a home in a qualifying rural area. The USDA, which insures USDA loans, determines which sectors are eligible. With the exception of large cities and densely populated suburbs, most of the land area of the United States qualifies.
The USDA also imposes income limits. Borrowers cannot earn more than 115% of the local median income in their area.
Most home loans must meet loan limits set by Fannie Mae and Freddie Mac. For a single-family home, the maximum is $766,550 in the United States.
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But for homebuyers in higher-priced markets — and those buying luxury homes — there’s another solution: a jumbo loan.
A jumbo loan is any mortgage that exceeds the loan limit. (This may also be called a “non-conforming loan.”)
Depending on the lender and your personal finances, you could be borrowing millions with a jumbo mortgage.
Because jumbo loans are not regulated by Fannie and Freddie, mortgage lenders have to set their own eligibility requirements. Most require a FICO score of 680-700 or higher and a minimum down payment of 10-20%. However, low down payment jumbo loans are available from select lenders starting at 5%.
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An adjustable-rate mortgage (ARM) is a mortgage loan with a variable interest rate. The rate is usually fixed for the first few years, after which it may adjust once a year depending on the broader interest rate market.
The 5/1 ARM has a total term of 30 years, but your interest rate is fixed only for the first five years. After that, your rate may change every year.
If mortgage rates are generally rising, your ARM rate will likely increase each year. Your monthly mortgage payments will also increase. This makes an ARM riskier for homeowners over the long term than a fixed-rate mortgage.
Most borrowers only choose an ARM if they know they will own the home before the fixed-rate term expires—usually within the first five years.
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Many borrowers have never heard of an 80/10/10 loan, also known as a “piggyback loan.” But this type of mortgage has unique advantages for the right borrower.
Using this structure, the homebuyer pays 10% down. A home equity line of credit (HELOC) is another 10% down payment.
So, in effect, the borrower is paying 20% without saving the full 20% in cash.
PMI is charged on most loans at a discount of less than 20%, and adds an additional monthly cost to the homeowner. Avoiding this could save you a few hundred dollars a month.
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The downside of the add-on loan is that you are taking out two separate loans for the home at once. So you will have two monthly payments, with interest.
If you’re interested in this strategy, talk to a loan officer or mortgage broker who can help you calculate your payments and determine if an additional loan would save you money.
The four main types of home loans are conventional loans, FHA loans, VA loans, and USDA loans. Conventional loans are not backed by the federal government, but most are required to meet lending guidelines set by Fannie Mae and Freddie Mac. FHA, VA, and USDA loans are all backed by the federal government but are offered by private lenders. Most major lenders offer all four mortgage programs, although obtaining USDA loans may be a little more difficult.
The most common type