Different Types of Home Loans to Choose From

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Buying a new home might be the biggest and the most expensive decision you may be making in your life. But before you start house hunting, you need to understand the different financing options available to support your decision.

Given below is a list of different types of home loans, that can help you choose the appropriate option according to your financial situation, and realize your dream of owning your home:

Conventional loan

The conventional mortgage is available for borrowers with good credit scores (FICO score of 620 or higher). Also, you need to have the financial ability to make a sizable down payment (usually 20 percent of the home value). Your Debt-to-Income ratio has to be below 43 percent.

There are two types of conventional loans – conforming loans and non-conforming loans. A conforming loan is one that meets the FHFA (Federal Housing Finance Agency) standards pertaining to the loan size, credit, as well as debt. There is a maximum limit on the amount of loan that you get here. On the other hand, non-conforming loans are available for those who wish to buy homes that are more expensive. These loans don’t conform with the FHFA standards.

You can take out a conventional mortgage to buy a primary residence, a second home, or even an investment property. The borrowing costs are lower compared to the other types of loans, although the interest rates are a bit on the higher side. You might have to pay the Private Mortgage Insurance (PMI), if your down payment is less than 20 percent. However, you can get it cancelled once the 20 percent equity limit has been reached. If you go for a loan that is backed by Freddie Mac or Fannie Mae, you can even get one for a 3 percent down payment. Also, there might be chances that the seller is paying for the closing costs.

Jumbo loan

If you have decided to purchase a really expensive home, a Jumbo loan is what you need to go for. These are home loan products that don’t conform to the FHFA standards. They are available only in areas where home prices are exorbitantly expensive. The interest rates here may be similar to those on conventional loans. However, you may need a minimum FICO score of 700 to qualify for a Jumbo Loan. A down payment of 10 to 20 percent is usually mandatory. Your Debt-to-Income ratio has to be below 45 percent.

Government-insured loan

If you have a low credit score and do not have the financial ability to make a huge down payment, a government-insured loan is your best bet. These are mortgages that are backed by Government Agencies such as the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA).

FHA loans are available to borrowers with minimum FICO score of 580. The down payment required might be as low as 3.5 percent. However, you can get an FHA loan even if your credit score is as low as 500. In such cases you may have to make a 10 percent down payment. Get in touch with a few FHA loan lenders through FHA live transfer leads to find out if you qualify for one.

There are a few things you may have to understand about FHA loans, before you start applying for one:

·   FHA loans come with two mortgage insurance premiums that may make your mortgage payments expensive. Also, there is no way you can get these premiums cancelled, unless you refinance your FHA loan into a conventional mortgage.

·   FHA loans come with maximum loan limits that are often lower than that of conventional mortgages.

·   FHA loans are available only for primary homes. However, you can buy a multi-unit building through an FHA loan, live in one unit, and rent out the others.

·   The overall borrowing costs would be higher than those of conventional mortgages.

·   You may have to submit more documentation to prove your eligibility

USDA Loans are available for borrowers who wish to purchase homes in rural areas (or USDA-eligible areas). They come with zero down payment. However, you may have to pay certain extra fees.

VA loans are available only to U.S. military veterans, active military members, and their families. There is no down payment in this type of loan and no restriction on the credit score. You don’t have to pay any mortgage insurance. However, these loans do come with a funding fee that you may have to pay for, along with your other closing costs.

Other types of home loans

Apart from the above, there are a few other loans that you can consider while purchasing a home:

·   Construction loans – You can take a construction loan if you are thinking of building your own home. The down payment could be higher here. Also, you may have to submit sufficient proof that you are able to afford your monthly payments.

·   Interest-only mortgages – In this type of loan you only have to make payments towards the interest of your mortgage for a certain period (five to seven years). After the end of this period, you will be required to make regular monthly payments that go towards principal and interest.

·   Piggyback loans – Also known as 80_10_10 loan, a piggyback loan is actually a combination of two loans. You take one loan for 80 percent of your home price and another loan for 10 percent of your home price. The down payment is calculated on the 10 percent loan. Although you may be saving on the PMI payments, you will be paying more on the closing costs since there would be two sets of them. Also, the interest portion would be more since there are two loans.

·   Balloon Mortgages – In this type of loan you will be required to make a lumpsum payment towards the end of the term. Till then you will be making your regular monthly payments based on your loan term.

The Bottom Line

Now that you have understood the various options you have, to finance your home purchase, it is time to start your mortgage shopping. Get in touch with a few lenders and compare their terms before you decide on the right one. 

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Created on Jan 1st 2023 12:00. Viewed 117 times.


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