Buying a home is one of the biggest investments in a lifetime. However, when it comes to buying a home, financing can be a big challenge. Gone are the days when you built a cabin from trees cut on your own land. These days, unless you are a “Trust Fund Baby” you need to get a home mortgage loan. But with so many types of mortgages available in the market, it can be overwhelming for the first-time buyer to choose the right type for their circumstances. This blog post will explore five types of home mortgages you can choose from to ease the process of buying your dream home.
Conventional Loans
Conventional loans are the most popular type of mortgage loan. They are privately owned and guaranteed by entities like Fannie Mae, Freddie Mac, or private mortgage insurers. It is advisable to have a good credit score above 620 and a down payment of at least 3 percent to qualify for a conventional loan. However, if your down payment is less than 20% you will be required to get “Private Mortgage Insurance” (i.e. PMI).
So, Although 20% is often suggested for a minimum down payment, it’s not a requirement. You can put as much down as you’d like, or as little as 3%, depending on your lender and the loan.
In order to be considered a “conforming” conventional mortgage it must adhere to the underwriting guidelines created by the mortgage financing giants Fannie Mae and Freddie Mac.
FHA Loans
Backed by the Federal Housing Administration (FHA), these loans are government-insured. The qualification standards are more lenient than conventional loans, which means that people with lower credit scores and income can qualify for these loans.
If you have a credit score of 580 or more an FHA loan require a minimum down payment of 3.5%, while borrowers with a credit score of 500 to 579 need to put 10% down to get an FHA loan.
One downside of FHA loans is that they require you to pay upfront and monthly insurance premiums of 1.75% of the loan amount. Although this compensates for the low down payment, it can increase your monthly bill and ultimately cost you more in the long run.
VA Loans
Veterans can also have their piece of the pie if they want to own a home. VA loans are designed for active-duty military personnel, veterans, and their families. To qualify, you need to meet specific VA eligibility criteria, including serving for at least 90 days during wartime or 181 days during peacetime.
VA loans are a very special type of home mortgage since they don’t require a down payment, and the mortgage insurance premium is waived. But there is a “VA funding fee”. They do waive the fee under certain circumstances such as a service-connected disability.
Rates for Veterans, active-duty service members, and National Guard and Reserve members
| If your down payment is… | Your VA funding fee will be… | |
|---|---|---|
| First use | Less than 5% | 2.15% |
| 5% or more | 1.5% | |
| 10% or more | 1.25% | |
| After first use | Less than 5% | 3.3% |
| 5% or more | 1.5% | |
| 10% or more | 1.25% |
Note: If you used a VA-backed or VA direct home loan to purchase only a manufactured home in the past, you’ll still pay the first-time funding fee.
They offer competitive interest rates and can provide an affordable alternative to traditional financing options.
USDA Loans
USDA loans are backed by the US Department of Agriculture and are designed to help individuals who live in rural areas achieve homeownership. To qualify for these loans, you need to meet specific income requirements and purchase a home in a designated rural area. But you may be surprised what qualifies as a “rural area”. So it is certainly worth checking to see if your home qualifies for this type of home mortgage.
Like VA loans, USDA loans offer 100 percent financing, which means no down payment is required. They also provide competitive interest rates that can help you save money in the long run. In order to qualify for a USDA loan, you will have to meet both the program’s household income limits and purchase a home in an eligible rural area. Income limits vary by location and the number of persons in your household.
Other basic USDA eligibility guidelines
- Minimum credit score: No minimum is established, but often 640 with most approved lenders
- Credit history: Credit report should show no late payments or recent foreclosures or bankruptcies
- Income requirements: Income limits vary by region and number of persons in household. Typically, your income must be less than 115% of the area median income (AMI)
- Employment requirements: History of steady income and employment. Self-employed borrowers are eligible, too
- Property requirements: Must be a single-family home located in an eligible rural area that will be your primary residence
- Loan term: USDA only offers 30-year fixed-rate mortgages
Jumbo Loans
For those seeking a more luxurious home, a jumbo loan may be the solution. These loans are designed to be used for high-end properties that exceed the Federal Housing Finance Agency (FHFA) conforming limits. In most states, the limit is $647,200. You can talk with a mortgage lender to learn more about jumbo loans and if they’re right for you.
One downside to jumbo loans is that they come with higher interest rates than conventional loans. Also, the borrower needs to have excellent credit scores and financial stability to qualify for a jumbo loan.
When looking for a mortgage, it’s essential to weigh the advantages and disadvantages of each type of loan before making a decision. It is crucial to consider your financial goals, the size of your down payment, your credit score, and the size and location of the property you want to buy. Understanding these crucial factors will help you make an informed decision and avoid costly mistakes when buying your dream home.
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