So you found the perfect home to purchase. Now what?

You have only won half of the battle by finding your perfect property. The next part is to choose your mortgage.

Yes, you read it right. You can choose your mortgage depending upon your budget and needs. There are in fact, six types of mortgage to choose from – Conventional or Traditional mortgages, Conforming mortgages, Nonconforming mortgages, FHA-insured mortgages, U.S. Department of Veteran Affairs-insured mortgages, and U.S. Department of Agriculture-insured mortgages.

Although all these mortgages are made up of two parts – the principal and the interest, there are certain differences when it comes to the guidelines and eligibility criteria. Here is a low down on the six different types of mortgages:

Conventional or Traditional Mortgages

Conventional mortgages are mortgages that do not carry any guarantee from the Federal Government. You need to have a stellar credit score to be eligible for a conventional mortgage. Your income history and your employment play a huge role in determining the interest rate and the down payment you would pay for getting your mortgage.

If you are getting a conventional loan from one of the two government-sponsored enterprises – Fannie Mae or Freddie Mac, you can get one at a down payment as low as 3 percent. Nevertheless, if you do not wish to pay the PMI (Private Mortgage Insurance), you may have to pay 20 percent of your home value as down payment. 

You may find lenders who offer conventional mortgages with no PMI and low down payment requirements.

Conforming Mortgages

These are loans where in the FHFA (Federal Housing Finance Agency) sets the maximum loan limits, depending on the geographic area. The baseline CLL (Conforming Loan Limit) that was set by the FHFA for 2022 for single unit properties was $647,200. 

One thing to note here is that the higher maximum loan limits are set by FHFA in certain high-cost areas only, where in the home prices exceed the baseline loan limit by 115 percent or more.

Nonconforming Mortgages

Often known as Jumbo loans, nonconforming loans are loans that exceed the Conforming loan limits. They are not bought or sold by Freddie Mac or Fannie Mae because of the amount involved and the underwriting guidelines. 

The risk in these loans is very high for the lenders and they are only given to borrowers with large cash reserves. You need to have a strong credit to be eligible for a Jumbo loan and you need to pay at least 10 or 20 percent of the home value as down payment.

FHA (Federal Housing Administration) Loans

These loans are typically designed for home buyers who fall in the Low-to-moderate-income bracket. These are borrowers who don’t qualify for conventional mortgages and cannot afford to make huge down payments. The down payment for an FHA loan ranges between 3.5 percent and 5 percent.

The credit score requirements of FHA loans are more relaxed as they are insured by the Federal Housing Administration. A FICO score of 500 should be good enough to get an FHA loan if you are ready to make a 10 percent down payment. For a 3.5 percent down payment, you need to have a Fico Score of 580.

In this type of loan, the FHA guarantees to cover the loss of the lender in case the borrower defaults. Nevertheless, the FHA does not lend the money to the borrowers directly. 

One drawback associated with FHA loans is that they require the borrowers to pay the mortgage insurance premium, upfront as well as annually. The payment has to be made through the lifetime of the loan.

VA (Veterans Affairs) Loans

These loans come with a guarantee from the U.S. Department of Veteran Affairs and they are only given to qualified military service members, veterans, and their spouses. The best part of a VA loan is that it requires absolutely no down payment. The closing costs also are very few, which in most cases, are paid by the seller only. The interest rates are lower than those of the conventional mortgages and there is no need for any MIP or PMI.

Nevertheless, there is a funding fee that you need to pay depending upon your loan amount and military service category. You won’t be required to pay the funding fee if you are:

• A Veteran with a service-related disability

• A surviving spouse of a veteran who died from a service-related disability or while in service

• A service member with a Purple Heart

• A service member with a memorandum or proposed rating, eligible for pre-discharge claim compensation

If you are a veteran, an active military service member, or the spouse of a veteran or active military member, your best option to apply for a VA loan. You can get a VA loan tailored to your financial needs and at highly competitive terms. You should be able to get in touch with lenders who provide VA loans, through VA live transfer leads.

USDA (U.S. Department of Agriculture) Loans

If you are a low-income home buyer from a rural area in USA, you may qualify for a USDA loan that can finance your home at a low or no down payment. However, the home you buy should meet the eligibility rules of USDA.

More Classifications

Apart from the above classification, there are also the Fixed-Rate Mortgages and the Adjustable-Rate Mortgages to choose from. Fixed-Rate Loans come with interest rates that are fixed for the lifetime. The interest rates in ARMs are fixed for an initial period of time and fluctuate later on, based on the market conditions. 

You can also check out the First-Time Assistance Programs that provide down payment grants to first-time home buyers. These are sponsored by the local housing or state authorities to help first-time home buyers.

The Bottom Line

The type of mortgage you choose depends on your income, your credit score, your financial goals, and your financial health. A supportive mortgage broker or lender should help you choose the best loan product after analyzing your finances. Make sure you verify your credit report before applying for a mortgage.