Types of Mortgages and Which is Right for You 

Once you determine whether you are ready to buy a home from the standpoint of the minimum bank or lending institution standards, you will then need to determine which mortgage you will be considering.

According to Rocket Mortgage, “All types of mortgages are considered either conforming or nonconforming loans. Conforming versus nonconforming loans are determined by whether or not your lender keeps the loan and collects payments and interest on it or sells it to one of two real estate investment companies – Fannie Mae or Freddie Mac.”

In an article written by Rocket Mortgage, they outlined the various types of mortgages along with the pros and cons and defined each by either being conforming or nonconforming. They stated that “A conforming loan can be purchased by Fannie Mae or Freddie Mac.” Within this, there are a few requirements in order for the loan to qualify as a conforming loan. You may have heard of a conventional, fixed-rate, or adjustable-rate mortgage which all fall under conforming loan requirements. On the contrary, nonconforming loans are those that do not qualify. According to Rocket, “Most nonconforming loans will be government-backed loans or jumbo loans.”

Within the conforming category, the first mortgage type and most common is a Conventional Mortgage.

These loans have lower requirements around income and type of home but do have greater restrictions around debt-to-income and credit score. 

A Fixed-Rate Mortgage is a mortgage that locks you in at a certain rate for the life of the loan.

So you could lock in a rate for 10, 15, or 30 years accordingly. Typically the lower the duration, the better the interest rate. Now there is talk of 40-year mortgages becoming a thing as housing affordability for Americans goes out of sight–but we will see what happens in the next few years around this gaining momentum.

An Adjustable Rate Mortgage, otherwise known as an ARM, has an introductory rate that then adjusts and can escalate based on market conditions.

This can be helpful initially to lower the monthly payment, but even with rate increase caps in place, can cause inconsistencies in your mortgage payment over the life of the loan, making it more difficult to include in your Plan to Spend or Budget. For example, a 5/1 is a mortgage that has a fixed rate for the first five years and then adjusts thereafter according to market conditions.

FHA Loans

Within the nonconforming category, the first mortgage type is an FHA mortgage, which the Federal Housing Administration insures. FHA loans are typically more-accessible than conventional due to more lenient credit rating requirements. 

USDA Loans

A USDA mortgage is insured by the United States Department of Agriculture and is for buyers purchasing in rural or even suburban areas. So the property type has to come into play with this type of mortgage, and only certain properties will qualify. My brother purchased a home in a rapidly growing area on the east coast, and although his home is centrally located, he was able to qualify for a USDA mortgage which came with some great perks.

VA Loans

A VA mortgage is insured by the Department of Veterans Affairs and has a minimum service requirement for the armed services. Being in a family with a number of military veterans, I know multiple family members who have utilized this; however, it’s important to make sure to compare rates to ensure that the VA fees and interest rates do not make the lower down-payment requirements less attractive.

A jumbo loan is a loan amount above a certain threshold that carries higher minimum qualifications and requirements set forth by the debtor.

Oftentimes these jumbo loans are north of $550k, depending on your area. So you will only qualify for a jumbo loan if your home purchase minus down payment sits above the threshold for your area.

Balloon mortgages are those that are the least popular, especially post-recession.

These mortgages have lower requirements to qualify as well as typically lower interest rates and resulting payments. Still, they have a large sum due at a certain point in time that puts both the lender and borrower at higher risk. 

During the great recession, there were several other nonconforming loans like interest-only, ninja or no income, no job, no assets, as well as other creative products to get people into homes. With greater regulation, many of these are rarely seen today.

A reverse mortgage is a way to capture or unwind the equity built in your home if you are over the age of 62.

This provides an income source for someone who may have much of their net worth tied up in their home and inaccessible without a HELOC, home equity loan, or by selling the home and moving.

For many of these loans, there will be a requirement of PMI, or private mortgage insurance, which is very common post-recession. This is typically attached to the monthly payment at a percentage of the total outstanding loan. For some loans, this PMI will remain for the life of the loan, while others, you can either have removed or it will drop off when the loan to value hits a certain figure. In order to avoid PMI, most providers require at least 20% down.

Now with each loan type, there will be varying degrees of requirements, but generally speaking, you will want to avoid creative loans. Ones that promise lower initial interest rates or payments due to a balloon payment are either interest-only or adjustable. Locking in a fixed-rate conventional mortgage is typically the best route if you need to get a home loan.

CTA:

My call to action is to do your research before finding the house. So many may or may not even get prequalified before finding the home of their dreams to pursue. Make sure to not only get prequalified but to actually go through the process of finding the mortgage type that works best for you.

https://www.rocketmortgage.com/learn/types-of-mortgages

https://www.credible.com/blog/mortgages/types-of-mortgage-loans/