If you’re like most people, once you decide to buy a home, you’ll need to start looking for a mortgage loan. This can be a little worrisome, especially for first-time homebuyers, since they may not know of the nitty-gritty of the home loan application process.
If you are considering purchasing a home, the first thing that you should do in this situation is to research the various types of loans that are available to you. Don’t assume a conventional loan from a brick-and-mortar bank is your only option! Here, we’ve made a list of five types of mortgage loans that homebuyers may be able to access:
Conventional mortgages: This type of mortgage is not insured by the federal government. Conventional loans can be of two types: non-conforming and conforming loans. A conforming loan has the loan amount within the maximum limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans which are for large mortgages (above FHFA limits) are the most common type of non-conforming loans. Generally, lenders ask you to pay for private mortgage insurance on conventional loans if your down payment is below 20% of the purchase price of the home. If you have a FICO score of at least 620, a debt-to-income ratio of 45-50%, you can get a conventional mortgage. Your overall borrowing costs will also be lower than other mortgages.
Jumbo mortgages: These are conventional mortgages with non-conforming loan limits. Currently, the maximum jumbo loan limit in most of the U.S. is $548,250 but it could go up to $822,375 in high-cost areas. A FICO score of 700 or higher, a down payment of 10% to 20%, a debt-to-income ratio below 45%, etc., are required for jumbo mortgages.
Government-insured mortgages: The Federal Housing Administration (FHA), The U.S. Department of Agriculture (USDA), and the U.S. Department of Veterans Affairs (VA), all back mortgages to help eligible Americans buy homes. FHA loans are for those who can’t make large down payments or don’t have a good credit rating.
Fixed-rate mortgages: Fixed-rate mortgages apply the same interest rate over the full period of your loan, thus keeping the monthly loan payment amount the same always. These loans are usually offered for 15, 20, or 30 year-periods.
Adjustable-rate mortgages: Adjustable-rate mortgages (ARMs) have fluctuating rates of interest. Look for an ARM that caps your maximum interest rate or monthly loan amount.