Type of Mortgages for Home Buyers

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Welcome to the CORE College of Real Estate Youtube channel. As someone considering buying a house, it’s also important to research mortgage types and the neighborhoods you want to live in. 

Researching mortgages in advance instead of during the transaction will help direct you to a type of home that your budget can afford. If you want more of this content, subscribe to the CORE College of Real Estate Youtube channel and hit the notification bell.

You have several options when buying a house, which makes it hard to decide on the right type of mortgage loan. Depending on your needs, you’ll need different requirements for various types of mortgages. Selecting the correct loan for your situation can lower your down payment and decrease interest payments over the life of the loan.

 

Requirements to Get a Mortgage

To find the most appropriate mortgage for your house, understand the loan types that you’re eligible for. The following factors will influence what type of home loan you qualify for:

Lenders use down payment size when considering mortgage rates.

Monthly mortgage payment: Mortgage lenders will estimate the total amount of money you can afford to pay back for a loan. When calculating your monthly budget rest, taxes, homeowner’s insurance, utilities, and any fees., include principal.

Your credit score will help determine how much interest you pay on a loan.

 

Types of Home Loans

Conforming versus non-conforming loans are characterized by whether the mortgage is collected on and kept by your lender or sold to Fannie Mae or Freddie Mac. All types of mortgages are considered conforming if your lender approves the loan.

 

• Conforming Loans

A conventional mortgage is a conforming loan, which refers to a loan that can be purchased by Fannie Mae or Freddie Mac. For this loan to be approved by your lender, it must meet minimal requirements set by the Federal Housing Finance Agency, and those requirements currently include:

The maximum dollar limit applies in most regions in the US, with limits as high as $647,200 in 2022. In Alaska, Hawaii, and some locations, the limit is as high as $970,800. Higher limits exist if you have a multifamily property, although the lenders cannot sell your mortgage to Fannie or Freddie and you will not qualify for a super conforming loan unless you meet specific qualifications.

If your loan isn’t federally backed, it can’t already be insured by the government. Some of the government bodies that offer insurance on home loans include Veterans Affairs and the Federal Housing Administration.

Conforming mortgages must meet specific criteria, like your credit score and property values. A Home Loan Expert can help determine if you qualify based on how much you earn and your home’s value.

 

• Non-conforming Loans

If your loan fails to meet the standards set by lenders, the lender will decide whether you qualify or not. Some non-conforming loans are more lenient than conforming loans.

With certain loans, credit-worthy individuals may be able to get a jumbo mortgage for a loan that isn’t on their credit report, like bankruptcy. These loans are backed by the government or come from other lenders.

 

Understanding Different Types Of Mortgages

One of the benefits of a mortgage is that it can be tailored to help you meet your changing needs. To decide which mortgage best fits your situation, consider what type of borrower you are and take advantage of the advantages or disadvantages of each loan type.

By considering how much you need to borrow for your mortgage, you’ll be able to know what funding option is best for you. Budgeting with a calculator can help determine this cost.

 

• Conventional Mortgages

Conventional mortgages are the most common type of mortgage, which also have stricter regulations on your credit score and your debt-to-income ratio.

Buying a home is easier than ever with the industry standard of requiring a 20% down payment, making credit scores at least 620, and skipping paying for private mortgage insurance.

With a fixed-rate loan, you won’t have to worry about making an expensive PMI. If you decide to take out a conventional fixed-rate loan the cost of mortgage insurance is often lower than other types of loans (like FHA loans).

For most people, a conventional loan is the way to go. Interest rates are lower and less demanding when compared to other types of loans- and if you can put down at least 3%, you may want to consider a USDA or VA loan.

 

Pros Of Conventional Mortgages:

The cost of borrowing is much lower than the traditional loans, which include fees and interest.

Get your down payment from 3% on qualifying loans today.

 

Cons Of Conventional Mortgages:

PMI maintenance fees are determined by the down payment.

Home Buyers Who Might Benefit:

Borrowers with a stable income and credit are approved.

 

• Fixed-Rate Mortgages

Fixed mortgages offer predictable monthly payments, and the interest rate and your loan’s principal stay the same throughout the length of your loan. Your payment may fluctuate due to changes in property taxes and insurance rates, but for the most part, fixed-rate mortgages are a very reliable option.

A fixed-rate mortgage might be a better option for you if you live in your “forever home.” A fixed interest rate gives you a better idea of how much it will cost each month and how much you’re able to budget and plan long term.

Current interest rates for mortgages may be higher than your rate if you lock them in. Locking in may cause you to overpay thousands of dollars in interest. Speak with a local real estate agent or Home Loan Expert to learn more about current trends that could affect the market.

 

Pros of Fixed-Rate Mortgages:

Monthly payments don’t change over the life of your loan, making it easier to manage a budget.

 

Cons of Fixed-Rate Mortgages:

If you use high-interest rates, a consumer might end up paying more over time on a loan.

 

• Adjustable-Rate Mortgages

ARMs are 30-year loans with the interest rate adjusted according to market rates.

You agree to a fixed interest rate when you take out an ARM loan and the interest is already lower than a 30-year fixed loan.

After your introductory period ends, your interest rate will change depending on a predetermined index. If the index’s market rates increase, your interest rate increases. Conversely, if the index’s market rates decrease, it decreases.

ARMs are loans that allow you to borrow a fixed amount and choose the interest rate (usually at a premium- the lower the interest rate, the higher you pay in fees). Rate caps set how much your interest rate can change each year. For example, your loan may earn 2% a year whereas another loan might earn 6%. The difference is that with the caveat of an APR (Annual Percentage Rate) on these loans, once your APR exceeds your set cap it cannot drop below it. These rates are calculated using actual market data to better reflect what consumers are borrowing for and the cost thereof.

Adjustable-rate loans can be a good choice for homeowners if they plan to purchase a starter home before moving on to their next destination. You can easily take advantage and save money if the individual doesn’t plan to live in the home throughout the loan’s full term.

 

On the other hand, ARMs can give you a little extra cash to put toward your debt. So if you pay your loan early it can save you thousands of dollars in the long run.

Increasing your interest rate can get you more money

 

Home Buyers Who Might Benefit:

In certain situations, borrowers might misinterpret their home ownership term.

Government-Backed Loans

With government-backed loans, lenders have less risk because the government’s insuring agency will pay for your loan if you default. You qualify for these loans if you can’t get a conventional loan. These loans include FHA, VA, and USDA loans.

Each government-backed loan has specific criteria you need to meet to qualify as well as unique benefits, providing an opportunity already set before your eyes. With that in mind, if you meet the eligibility requirements and have the funds available, you may be able to save on interest or down payment requirements.

 

• Pros Of Government-Backed Loans:

This can mean reduced closing costs, which could free up money for other purchases and reduce interest paid on the purchase.

There are less rigid qualification requirements than usual loans.

 

• Cons of Government-Backed Loans:

Governments can levy high-interest charges, called funding fees or insurance premiums, to borrowers of certain types of loans.

 

FHA Loans

The Federal Housing Administration offers loans with a 0% downpayment and a maximum credit score of 580, while Rocket Mortgage® requires at least a 580 minimum credit score.

Lenders for USDA loans are backed by the United States Department of Agriculture and lower mortgage insurance requirements than FHA loans. You must meet income requirements and purchase a home in a rural area or suburban area to qualify for a USDA loan. Rocket Mortgage doesn’t currently offer USDA loans.

 

VA Loans

Some VA loans lead with a zero down payment and low-interest rate when compared to other types of mortgages. Veterans must meet service requirements as in the armed forces or National Guard to qualify for a VA loan.

 

Jumbo Loans

A jumbo loan is worth more than the conforming loan limit in your area. A jumbo loan is typically needed for people who want to buy a high-value property, like homes. The conforming limit in most parts of the country is $647,200, which means Rocket Mortgage will let you borrow up to $2 million in a jumbo loan.

Jumbo loans usually have similar interest rates to conforming loans, but a higher credit score and a low debt-to-income ratio are typically required.

With a credit score of 700 or higher, significant assets, a low debt-to-income ratio and no missed payments, users can obtain loans of up to $647,200.

 

Government-Insured Loan

The U.S. government isn’t a mortgage lender, but it helps Americans buy homes. Three government agencies 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).

To be approved for government loans like the FHA, you need a minimum score of 580 and 10% down. The higher your score is, the lower your mortgage insurance premium will be. However, the seller still has to pay closing costs which can raise your overall costs.

 

USDA loans help moderate- to low-income homebuyers buy a home in rural areas. To qualify, you must buy a home in an eligible area and meet certain income limits. There are fees involved and one notable one is the upfront fee which can be financed with the loan and an annual fee.

With a flexible mortgage rate and no low-income requirements, this is the financial product of choice for members of the U.S. military and their families. VA loans also do not require a down payment or mortgage insurance, while closing costs are capped and paid by the seller. Unlike conventional mortgages, these loans charge a funding fee on top of the loan amount which can be paid at closing or rolled into the cost of the loan with other closing costs.

FHA loans with an unaffordable upfront cost can’t be canceled unless you refinance into a conventional mortgage.

FHA loans offer lower limits than many conventional mortgages, limiting the number of homes they can loan.

Borrowers must live in the property itself, despite multi-unit buildings. (You may be able to finance a building and rent out some units, but not all)

 

Who should get a government-insured loan?

Loans backed by FHA and USDA are a great option for those who have a low credit score but do not have sufficient funds for down payments. With loans provided to military service members, veterans, and their spouses, VA-backed loans are often better options than conventional loans.

 

• Fixed-Rate Mortgage

Because fixed-rate loans maintain the same interest rate over the life of the loan, your monthly mortgage payment will stay the same. 15 or 30-year mortgages are typically available, but some lenders allow borrowers to choose any term between 8 and 30 years.

 

Who should get a fixed-rate mortgage?

If you want to avoid the chance of interest rate hikes for a foreseeable period, and prioritize some stability in your monthly payments, one type of fixed-rate mortgage would be appropriate.

 

• Adjustable-Rate Mortgage (ARM)

Adjustable-rate mortgages (ARMs) have fluctuating interest rates that can go up or down with market conditions. This type of mortgage is secured by an asset like your house. Many ARM products have a fixed interest rate for a few years before the loan changes to a variable interest rate for the remainder of the term. For example, you might see a 7-year/6-month ARM, which means that your rate will remain the same for the first seven years and will adjust every six months after that initial period. If you consider an ARM, it’s important to review the fine print to know how much your rate can increase and how much you could wind up paying after the introductory period expires.

At first, 30-year fixed rates are often lower than the 5/1 adjustable-rate mortgage.

Monthly mortgage payments could turn into default.

Home values may fall in the coming years, making it harder to refinance or sell your home before the loan interest rate resets.

If you plan to move before your home is paid off and you want to save on interest payments, an ARM could be of great benefit. The rate may change in the future based on how long you stay in the home.

 

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