August 7, 2020

Six Types of Mortgage Loans to Help You Find “Home”

When it comes to buying a house, there are lots of financing options out there. Depending on different criteria (like whether or not you served in the military, where the property you want to buy is located, or how much it costs), you might be eligible for more than one type of financing.

Let’s dig a little deeper into six types of loans that may be available to you.

Conventional Mortgages

A conventional mortgage is a fixed-rate mortgage that’s not backed by the government. It’s the most common type of loan used by borrowers purchasing homes—almost 75% of homes sold in 2018 were financed with conventional loans.

Conventional mortgages offer low interest rates, fast loan processing, and down payments options starting at 3% of the home’s sales price. However, since lenders (rather than the government) back conventional mortgages, they’re taking on additional risk in financing your home. So, if you put down less than 20% as your down payment, you’ll have pay for private mortgage insurance (PMI), too.

FHA Loans

In many cases, an FHA loan is one of the easiest mortgages for which prospective homeowners can qualify. Compared to other types of home loans, FHA loans offer more flexible down payment and credit requirements. These two key factors can make all the difference in owning vs. paying rent to someone else.

Borrowers with a minimum FICO (credit) score of 580 qualify for a down payment of just 3.5 percent—even on multi-unit properties. And, since money gifted to you by family members meets FHA down payment requirements, you can stretch your own money even further.

VA Loans

If you’re a member of the military, a veteran, or the qualifying spouse of a service member, a Department of Veterans Affairs (VA) loan could help you finance your dream home off base. Although every lending situation is different, government-backed VA loans often offer no down payment options, fewer closing costs, and better terms and interest rates than eligible borrowers might find elsewhere.

Although no private mortgage insurance is required, VA loans do come with a funding fee based on the amount of your down payment, your military status, and if you’re a first-time homebuyer.

USDA Loans

A USDA loan is a $0 down payment mortgage issued by the USDA Rural Development Guaranteed Housing Loan Program. USDA loans feature below-market interest rates and reduced mortgage insurance premiums. However—as the program name implies—USDA loans are designed to encourage rural development and homeownership.

To be eligible for a USDA loan, your household income must not exceed the maximum amount allowed in the county where the home is located. Also, the home you want to buy must be located in an eligible rural area (as defined by USDA).

Jumbo Loans

Jumbo loans, or jumbo mortgages, are just what they sound like—loans for expensive homes that exceed the maximum limit set by the Federal Housing Finance Agency (FFHA). They are known as non-conforming loans because they don’t conform to guidelines established by government-sponsored entities like Freddie Mac and Fannie Mae.

Jumbo loans include fixed-rate, adjustable-rate, and interest-only products, so be sure to explore all options that might be available to you.

Portfolio Loans

If you don’t qualify for a conventional mortgage, a portfolio mortgage could be an option for you. These loans are very different than other types of mortgages—a portfolio loan is one originated by a lender, then held by that lender (in their portfolio) until it’s paid off.

Portfolio loans are creative options that might be available to you based on the strength of your own financial portfolio. However, the decision of whether or not to approve a portfolio loan lies with each individual lender rather than government-sponsored entities like Freddie Mac or Fannie Mae.