For the Buyer

7 Types of Home Loans for all Homebuyers

By Amanda Webb on September, 27 2022

7 Types Of Home Loans For All Home Buyers

Are you in the market for a new home? If so, congratulations! Buying a home is an exciting process. But it can also be overwhelming, especially if you’re not sure where to start.

That’s why we’re here to help.

So, whether you’re a first-time buyer or you’re refinancing your current mortgage, read on for advice about the types of mortgage loans available and understand which is right for you.

Requirements To Get A Mortgage

To find the best mortgage for your prospective home, understand the types of loans you’re able to pursue. The factors below can influence the types of mortgages you’ll qualify for:

Estimated down payment

The lower your down payment, the higher risk you assume. If you don’t have enough money saved up for a down payment and closing costs, you may need to consider an alternative loan type or even renting instead of buying.

Monthly mortgage payment

If you can afford a monthly payment that exceeds the amount of rent you pay, it makes sense to purchase a home. If not, consider renting instead.

Credit score

Your credit score affects not just how much money you will pay in interest but also whether or not you can get approved for loans at all. The higher your score is, the better chances are that lenders will approve your application and offer favorable terms on their interest rates and fees.

Types of Home Loans: Conforming and Non-Conforming Loans

A home loan is a loan taken out to finance the purchase of a property. There are many different types of home loans available on the market, but they can broadly be grouped into two categories: conforming and non-conforming loans. In this blog post, we’ll take a look at the differences between these two types of loans.

Conforming Loans

A conforming loan is a loan that meets the guidelines set forth by government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

These guidelines include factors such as credit score, debt-to-income ratio, loan amount, etc. One of the main benefits of a conforming loan is that they typically have lower interest rates than non-conforming loans. This is because GSEs like Fannie Mae and Freddie Mac can securitize and sell conforming loans on the secondary market, which helps to bring down the overall cost of borrowing.

Additionally, because GSEs guarantee payment on these loans, lenders are more likely to offer better terms to borrowers.

Non-conforming Loans

Non-conforming loans are loans that do not meet the guidelines set forth by GSEs Fannie Mae and Freddie Mac. The most common type of non-conforming loan is a jumbo loan, which is a loan that exceeds the maximum loan limit set by Fannie Mae and Freddie Mac.

Jumbo loans usually carry higher interest rates than conforming loans because they are considered to be more risky. Another type of non-conforming loan is a portfolio loan, which is a loan that a lender holds onto instead of selling on the secondary market.

Portfolio loans typically come with higher interest rates and stricter underwriting standards than conforming loans because lenders are taking on more risk by holding onto these loans instead of selling them.

Understanding Different Types Of Mortgages

There are many different types of mortgages available, and each has its own set of pros and cons. We’ve broken down each type of mortgage loan and provided a brief overview so that you can make an informed decision when it comes time to purchase a home.

Conventional Mortgages

A conventional mortgage is a loan that is not backed by the government. These loans are available from banks, credit unions, and online lenders. Conventional loans can be either fixed-rate or adjustable-rate mortgages.

Pros Of Conventional Mortgages:

  • Save money with a lower interest rate than an unconventional mortgage
  • Down payment as low as 3%
  • Qualify for a Conventional Mortgage with less than perfect credit

Cons Of Conventional Mortgages:

  • Private Mortgage Insurance (PMI) is required if your initial down payment is below 20%.
  • In order to qualify, you must have a credit score of 620 or higher and a low DTI.

Fixed-Rate Mortgages

A fixed-rate mortgage has an interest rate that remains unchanged for the life of the loan. This type of loan provides stability and peace of mind for borrowers who do not want their monthly payments to increase.

Pros Of Fixed-Rate Mortgages:

  • Keep your monthly budget stable, no matter what happens in the market
  • No surprises – you’ll always know exactly how much you need to budget for each month

Cons Of Fixed-Rate Mortgages:

  • If the interest rates are high, you will most likely end up paying more money in interest over time.

Adjustable-Rate Mortgages

An adjustable-rate mortgage (ARM) has an interest rate that changes over time. The initial interest rate is usually lower than that of a fixed-rate mortgage, but it can increase over time. ARMs are best for borrowers who are expecting their incomes to increase or who plan on selling their home before the interest rate adjusts.

Pros Of Adjustable-Rate Mortgages:

  • Low-interest rates for the initial introductory period

Cons Of Adjustable-Rate Mortgages:

  • If the rate increases, your monthly payments could increase significantly.

Jumbo Loans

A jumbo loan is any mortgage that exceeds the maximum conforming loan limit set by the Federal Housing Finance Agency (FHFA). Jumbo loans are available in both fixed-rate and adjustable-rate options but typically have higher interest rates than conventional loans.

Pros Of Jumbo Loans:

  • You can borrow more money for a more expensive home.
  • Their interest rates are similar to conforming loan interest rates.

Cons Of Jumbo Loans:

  • It’s tough to qualify for, typically necessitating a credit score of 700 or higher, substantial assets, and a low debt-to-income ratio.
  • You’ll need a significant down payment, usually between 10 and 20% of the purchase price.

Government Backed Loans

FHA Loans

A Federal Housing Administration (FHA) loan is a government-backed loan available to borrowers with less-than-perfect credit. FHA loans have low down payment requirements and are available in both fixed-rate and adjustable-rate options.

USDA Loans

A United States Department of Agriculture (USDA) loan helps low- to moderate-income borrowers purchase homes in eligible rural areas. USDA loans are available in both fixed-rate and adjustable-rate options and do not require a down payment.

VA Loans

A Veterans Affairs (VA) loan is a government-backed loan available to eligible military veterans and their spouses through the Department of Veterans Affairs. VA loans offer competitive interest rates and do not require a down payment or private mortgage insurance (PMI).

Pros Of Government-Backed Loans:

  • Save on interest and down payments
  • Reduced closing costs
  • Easier qualification requirements
  • Flexible loan terms

Cons Of Government-Backed Loans:

  • To be eligible, you must fulfill specific requirements.
  • Insurance premiums are assessed on government-backed loans of various sorts, which can inflate borrowing costs.

Find The Best Mortgage For You

If you are in the market for a new home, it’s important to understand the different types of mortgages available and what each one entails.

Here at Radius, we want to make sure you have all the information you need to make the best decision for your family.

Contact us today to learn more about our mortgage options or to get started on your application.

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