Different Types Of Home Loans For Home Buyers

If you’re on the hunt for a new home, then you’ve got a ton of home loan options to consider. Let’s explore the different types of home loans, weigh their pros and cons, and find the perfect fit for you.

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Types of Home Loans

When it comes to choosing the right financing for your home purchase, you have a variety of home loan options to consider. Let’s explore the different types of loans available to determine which option could be right for you.

Government Backed Loans

A government backed loan is a type of mortgage that is guaranteed by a government agency. These loans are offered by mortgage lenders and are designed to make homeownership more accessible and affordable for individuals and families. Some types of government backed loans available include, VA loans, USDA loans, and FHA loans.

FHA Loans

Have you ever dreamt of owning your own home, but felt discouraged by the high down payment requirements or the need for a perfect credit score? FHA loans might be the key that opens the door to your dream! Backed by the Federal Housing Administration (FHA), these loans offer more flexible requirements, making homeownership a possibility for many first-time buyers and those with a lower credit score or limited savings for a down payment. Whether you prefer the stability of a fixed rate or the potential benefits of an adjustable rate, FHA loans can accommodate your needs.

VA Loans

Did you serve your country? Now, let your service become your down payment on the American dream! VA mortgage loans, backed by the Department of Veterans Affairs (VA) are a powerful financing tool specifically designed for veterans, active-duty service members, and eligible surviving spouses. These loans offer a unique set of benefits, including the possibility of buying a home with zero down payment and often featuring flexible terms.

USDA Loans

Do you dream of escaping the hustle and bustle of city life and settling down in a peaceful rural area? But worried about the hefty down payment typically required for a home? USDA loans, an government-backed mortgage option, could be your ticket to charming small towns and scenic landscapes! Backed by the U.S. Department of Agriculture, these loans are specifically designed for rural homeownership. The best part? USDA loans eliminate the need for a down payment and can even save you money by avoiding private mortgage insurance (PMI).

Pros of Government Backed Mortgage Loans

• Easier to qualify: It could be easier to qualify for government-backed loans because they often have relaxed credit score and down payment requirements compared to conventional loans. This is helpful for borrowers with limited savings or lower credit scores
• Lower down payment: These loans typically allow for a down payment of less than 20%, which can significantly reduce the upfront cost of buying a home. For example, VA and USDA loans require no down payment at all.

Cons of Government Backed Mortgage Loans

• Mortgage insurance: Regardless of the size of the down payment, mortgage insurance is mandatory on all government backed loans and remains in place throughout the life of the loan, unless you refinance or sell the home.
• Limited flexibility: May have stricter requirements regarding the property itself compared to conventional loans and how the loan funds can be used.

Conventional

Conventional loans are mortgages which are not insured or backed by the government and are available with either a fixed or adjustable interest rate. These loans are often considered conforming loans, meeting the down payment and income requirements set by Fannie Mae and Freddie Mac. Additionally, conventional loans conform to the loan limits set by the Federal Housing Finance Administration (FHFA). 

Furthermore, while there may be stricter requirements to qualify for a conventional loan compared to government-backed mortgages, conventional loans offer a range of down payment options, mortgage insurance flexibility, and less restrictive property guidelines. 

Pros of Conventional Loans 

• Range of down payment options: Offers down payment flexibility, with options as low as 3%, making homeownership more accessible.   
• Mortgage Insurance Flexibility: Mortgage insurance is not required for purchases with 20% down or more. If you put down less than 20%, then you could work with your loan officer to determine the mortgage insurance option to best fit your scenario.   
• Range of Properties: Conventional loans can be used to finance primary residences and second homes and investment properties. This flexibility can be advantageous for real estate investors or those looking for a vacation home. 

Cons of Conventional Loans 

• Stricter Credit Requirements: These types of loans tend to have stricter credit score requirements while also requiring a lower debt-to-income ratio, which may make qualifying more difficult for some borrowers.    
• Limited Government-Backed Guarantees: Unlike FHA, USDA, and VA loans, conventional loans lack government-backed guarantees, potentially affecting borrower support during financial hardships or defaults. 
• Potential for Higher Interest Rates: Lower credit scores or borrowers with higher risk could result in higher interest rates and increased monthly payments.  

Jumbo Loans 

Just like it sounds, jumbo loans are just bigger loans. Jumbo loans can be used to purchase a home worth more than the conforming loan limit set yearly by the Federal Housing Finance Agency (FHFA). Commonly referred to as a non-conforming loan, jumbo loans do not meet the lending standards set by Fannie Mae and Freddie Mac and are typically used for primary homes, vacation homes, second homes, and investment properties. Jumbo loans are also available as both fixed-rate and adjustable-rate mortgages. 

Pros of Jumbo Loans 

• Financing higher loan amounts: Designed to finance properties that exceed the conforming loan limits, which allows one to borrow larger amounts to purchase higher-priced homes or investment properties. 
• Flexibility in property types: These loans are specifically designed to exceed conforming loan limits, meaning they allow you to borrow significantly more than with a regular mortgage. This opens the door to financing homes with larger price points, luxury residences, vacation homes, and investment properties.  
• Customized loan terms: These loans can offer more flexibility in terms of repayment options. Borrowers can choose from various loan terms such as fixed-rate or adjustable-rate mortgages and customize the repayment schedule to fit their financial goals and needs. 
• Expanded home buying opportunities: By accessing larger loan amounts, jumbo loans enable you to consider properties in high-cost markets or desirable neighborhoods where home prices exceed the conforming loan limits. 

Cons of Jumbo Loans 

• Stricter qualification requirements: Obtaining a jumbo loan is more challenging due to stricter qualification requirements and a lengthier, potentially more extensive underwriting process than securing a conforming loan.  
• Higher down payment: Typically requires a larger down payment, usually at least 20% of the home’s purchase price, which may pose affordability challenges.  
• Potential for higher interest rates: Due to higher risk, jumbo loans may carry slightly higher interest rates, although competitive rates are attainable for borrowers with strong credit profiles.  
• Market volatility impact: Jumbo loans are more susceptible to market volatility. In the event of a market downturn, properties financed with jumbo loans could lose value. This could result in negative equity and financial instability for borrowers. 

Fixed Rate Mortgages 

Fixed rate mortgages have the same interest rate for the entire duration of the loan. This means that your monthly mortgage payment, covering the loan principal and interest, remains consistent. Typically, fixed loans come with terms of 15 or 30 years and are a popular option for someone who plans on staying in their home long term. 

Pros Fixed Rate Mortgages 

• Predictable Payments: Your interest rate and monthly payment stays the same throughout the loan period, giving you peace of mind and financial predictability. 
• Protection Against Rising Rates: If interest rates go up in the future, then you won’t have to worry about higher monthly payments, which makes it easier to manage your budget. 

Cons Fixed Rate Mortgages 

• Potentially Higher Initial Interest Rate: Compared to an adjustable rate mortgage, fixed rate loans may come with a slightly higher initial interest rate. 
• Missed Potential for Falling Rates: If interest rates decrease significantly, then you won’t benefit from a lower monthly payment. 

Adjustable Rate Mortgage 

An adjustable rate mortgage (ARM), also known as a variable-rate mortgage, is a type of home loan where the interest rate can change over time. Unlike a fixed rate mortgage, which keeps the same interest rate throughout the loan period. An adjustable interest rate could fluctuate up or down based on market conditions. This means the monthly mortgage payments may increase or decrease, depending on how the interest rate changes.

Additional Types of Mortgage Loans 

If you’re finding it difficult to qualify for a traditional mortgage due to credit score, then down payment, or income requirements, there are alternative options available. Here are some of the most common non-traditional loans: 

Non QM Loans 

Non QM loans (nonqualifying mortgage) are loans that don’t adhere to the standards set by the federal government and the Consumer Financial Protection Bureau. These loans are tailored for those who don’t meet traditional mortgage criteria. Specifically, non QM loans use alternative methods like bank statements or asset consideration for income qualification. This flexibility widens access to homeownership for a more diverse group of borrowers. 

Home Improvement Loans 

A home improvement loan is a type of financing which helps homeowners pay for repairs, renovations, and upgrades to their property. These loans could be used for a variety of projects — from essential fixes like roof replacement to cosmetic upgrades like kitchen remodels or bathroom additions. 

There are different types of home improvement loans. Some provide a lump sum payment for the entire project upfront. While others operate more like credit cards, allowing you to access funds as needed throughout the renovation. 

Construction Loans 

A construction loan is a type of funding that covers the costs of building a residential home, starting from purchasing the land to completing the structure. There are different types of construction loans. For instance, a standalone construction loan is a short-term loan. These typically last for one year, and it only covers the building phase. The borrower will then need to get a separate mortgage to pay off the home. On the other hand, a construction-to-permanent loan combines construction financing and a permanent mortgage into one loan. 

Piggyback Loans 

A piggyback loan is a creative financing strategy that involves getting two loans instead of one. You take out a primary mortgage for a large portion of the home’s value, typically around 80%. Then, you secure a smaller second mortgage to cover the remaining down payment needed to avoid private mortgage insurance (PMI) – that extra fee tacked onto your monthly payment when your down payment is less than 20%. Essentially, you’re piggybacking the second loan onto the first. This allows you to put down less upfront while still reaping the benefits of avoiding PMI.  

Physician Loans 

Physician loans are a type of mortgage program specifically designed for medical professionals. They are a popular choice for doctors who are starting their careers as they do not require a down payment or private mortgage insurance (PMI). Since many doctors carry a significant amount of student debt after medical school or during their residency, it can make purchasing a home more challenging. As a result, physician loans offer unique allowances for these situations and are more willing to approve mortgages for doctors with high earning potential. 

Second Mortgages 

A second mortgage allows homeowners to tap into the equity they’ve accrued in their property. Equity represents the difference between your home’s current market value and the outstanding balance on your initial mortgage. By obtaining a second mortgage, you are essentially borrowing against this accumulated equity, receiving either a lump sum or a line of credit. rast=”auto”>Home equity loans and home equity lines of credit (HELOCs) are typically the two most common types of second mortgages. 

What to consider when choosing a type of home loan? 

Choosing the right home loan is an important step in the homebuying process. With a variety of options available, understanding the key factors that impact your mortgage is essential. Here’s a breakdown of some factors to consider. 

Interest Rate 

The interest rate is the extra amount, shown as a percentage. You pay this on top of the loan amount throughout the loan term. It directly affects your monthly payment. A lower interest rate means you pay less each month, which helps you save money in the long run. 

Mortgage Loan Term 

The loan term is the amount of time you have to fully repay the loan. It’s typically either 15 or 30 years. A shorter term means you pay off the loan faster but have higher monthly payments. A longer term could mean lower monthly payments, but you end up paying more in interest over time. 

Down Payment 

The down payment is the upfront portion of the home’s purchase price that you pay out of pocket. A larger down payment reduces the amount you need to borrow and could lead to a lower interest rate. Additionally, it can potentially help you avoid private mortgage insurance (PMI).  

If you’re short on funds, then Direct Mortgage Loans offer a variety of down payment assistance programs which could help! 

Credit Score Requirements 

Your credit score impact the type of loan you qualify for and the interest rate you’ll receive. Generally, lenders look for higher credit scores for the most favorable loan terms. If your credit score is lower, then you may still qualify for a loan. However, you might have to pay a higher interest rate. 

Cost 

There are additional costs associated with a mortgage, including closing costs, origination fees, and PMI (if applicable). Be sure to factor in these expenses when comparing loan options. 

How To Get Loan for A House  

While the process of getting a loan for a home can vary depending on your situation, the overall process follows a similar path for most borrowers. Here’s a breakdown of the general steps involved: 

1. Connect with a Loan Officer: Start by speaking with a trusted Loan Officer. We can guide you through the mortgage qualification. 
2. Explore Loan Options: There are various loan options available for different needs and financial situations. A Loan Officer can help you explore these options and recommend the best program for you. 
3. Gather Your Documents: Once you understand your loan options, gather the necessary documents to verify your financial stability. Typically, you’ll need recent pay stubs, tax returns, W-2s, and bank statements. 
4. Submit an Application: Apply for mortgage pre-approval by providing your personal information, financial documents, and authorizing a credit check.  
5. Find a Home: Work with a trusted Real Estate Agent to find a home and make an offer. 
6. Closing: Once your offer is accepted, sign the closing documents and complete any remaining steps with your real estate agent and lender. 

FAQ’s About These Types of Home Loans

What is the best type of home loan?

When it comes to finding the best home loan, there isn’t a one-size-fits-all answer. The most suitable option depends on your financial situation and goals. For example, if you have a lower credit score and a smaller down payment saved, then a government backed loan with more relaxed requirements might be a better fit for you than a conventional loan designed for those with a higher credit score. Consider speaking with a Loan Officer to navigate the different options and find the best fit.

Can I get a home loan with a low credit score?

While a higher credit score typically qualifies you for better loan terms like lower interest rates, there are options for borrowers with lower scores. Government backed loans like FHA loans are designed for this purpose and often have lower credit score requirements compared to conventional loans.

What should you compare when selecting loans?

When choosing a loan, it’s important to compare key factors such as eligibility requirements, including minimum credit scores, income verification, and down payment needed. This will help you determine which loan option aligns better with your specific situation. Additionally, you can use our mortgage calculator to compare two different mortgage options.

What type of home loan should I get?

When choosing a home loan, it’s important to consider your specific situation. Start by understanding the factors that will impact your decision. Think about your financial situation, such as your credit score, down payment amount, and desired monthly payment. Moreover, think about your long-term plans for the house. Decide if you plan to stay there for a while or if you might want to sell in a few years. By considering these factors, you can narrow down your options and choose a loan that best suits your needs.

How can I find a mortgage lender near me?

If you are searching for a reliable mortgage lender in your area, then Direct Mortgage Loans offers a range of loan options tailored to your individual needs. Start the process and find out what you qualify for today by contacting one of our Loan Officers.