6 types of home loans: Which is the best for me?

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When buying a home, you have financing options. There are mortgages for all tastes and colors. While the 30-year fixed-rate mortgage may be the most traditional, it’s by no means the only option you have. Lenders will ask you questions about your income, your credit, and the type of home you want to buy. And with that information, they will recommend the types of loans that are best for you.

We’ll review six of the most common types of home loans on the market and address other important considerations, such as the loan term you need and whether a fixed or adjustable rate loan makes the most sense. Let’s get down to business.

Conventional loans

If you have good credit and a stable income, your lender will most likely first check to see if you qualify for a conventional loan. Considered a basic mortgage loan, a conventional loan simply describes a mortgage that comes from a private lender, such as a bank, and is not backed or insured by a government program. Conventional loans can be “regulated,” the most common type of loan, or “unregulated.”

The difference mostly comes down to the size of the mortgage you are trying to get. Regulated loans have maximum amounts set by the government ($510,000 in most counties) and are designed to be sold to Fannie Mae and Freddie Mac. These government-sponsored entities set other rules and Mortgage guidelines, including a minimum credit score of 620 in most cases and a minimum 3% down payment for some qualified borrowers.

Unregulated loans include “jumbo” mortgages (more on that later), as well as loans that don’t fall into any other mortgage category. They may be for people with poor credit or wealthy people with unusual financial circumstances.

Who are they ideal for?

Conventional loans are best for people with good credit who are looking for the lowest interest rates and a less complicated application process. These loans tend to cost less than most other types of home loans, such as Federal Housing Administration loans, as long as you qualify.

What to look out for

If your credit is not the best, you may have problems getting a conventional loan approved. Also, keep in mind that if you pay less than a 20% down payment, you’ll usually need to take out private mortgage insurance, which will add to the total cost of the loan.

FHA Loans

If you’re worried you won’t be able to get a conventional loan, an FHA loan might be an option.

Since FHA loans are mortgages made by private lenders but insured by the Federal Housing Administration, a government guarantee can help you get a mortgage you might not otherwise have been able to get.

However, it is important to know that not all applicants will be approved, and a 10% down payment may be required if your credit score is between 500 and 579. With credit scores of 580 or higher, you may be able to make a down payment of just 3.5%.

Although FHA loans may seem attractive, it’s important to consider the total cost of the loan when comparing it to other options (more on that later). So while the requirements are more flexible, when all costs are factored in, including required mortgage insurance, for example, FHA loans tend to be a more expensive product over the life of the loan than conventional mortgages.

Who are they ideal for?

FHA loans can be a great option if your monthly mortgage payment is within your reach but you don’t have the credit score needed to get a traditional mortgage. They may also let you buy a home with a low down payment if you qualify.

What to look out for

FHA loans can be more expensive than other types of home loans because the cost of the federal government guarantee is passed on to you. FHA requires a mortgage insurance payment on all loans in its program, which is paid in two ways: a down payment that is part of closing costs, and a monthly insurance premium.

The initial mortgage insurance premium is 1.75% of the loan amount ($3,500 for a $200,000 mortgage, for example). The monthly premium is typically $0.85 of the loan per year, or $1,700 per year for a $200,000 mortgage. Unlike conventional loans, you will have to go through a complicated process to cancel the mortgage insurance on an FHA loan.

VA Loans

If you are a veteran or actively serving in the military, you may want to take advantage of a VA loan, if you qualify. VA loans are mortgages insured by the US Department of Veterans Affairs that help members of the armed forces, veterans, and eligible family members buy a home. You will obtain these mortgages through a private lender, with the federal government guaranteeing a portion of the loan.

Even with a government guarantee, you will have to meet your lender’s credit and income standards to qualify for a VA loan. There is no minimum credit requirement, but lenders will take a close look at your finances to make sure you can afford your mortgage.

Who are they ideal for?

If you qualify for a VA loan, it can be very convenient. In many cases, you won’t even have to make a down payment. The VA guarantee also offers lower interest rates and better terms than you can get elsewhere, especially if you have bad credit. Another plus: VA loans don’t require mortgage insurance premiums.

What to look out for

To get a VA loan, you will need to apply for what is known as a “certificate of eligibility,” which provides details about your military service history. To qualify, you must have served a certain period of time, ranging from 90 days to two years, depending on when you were in the military.

USDA Loans

If you are buying a home in a rural area, you may want to consider a USDA loan. USDA loans are programs offered by the US Department of Agriculture that help low- and moderate-income people buy homes in rural areas. These programs lend money directly or guarantee loans from private lenders, depending on your eligibility.

You can use the direct loan program if you currently do not have adequate housing or cannot afford a traditional loan. Generally, you are only eligible if you live in an area with fewer than 35,000 people. Plus, these loans have fixed rates and usually don’t require a down payment. You will need to apply directly at a USDA Rural Development office.

The loan guarantee program is much more common. These types of USDA loans are obtained through an approved private lender. To be eligible, you generally must earn no more than 115% of your area median income and live in a rural area. You can look up whether your address is in a qualifying zone on the USDA website. If you qualify, you won’t have to make a down payment.

Who are they ideal for?

As we’ve mentioned, USDA loans are best for low- and moderate-income people who live in rural areas.

What to look out for

You may not qualify. To be approved, you must show that you can repay the loan, although there are no minimum credit score requirements. Your total monthly home payment must not exceed 29% of your monthly income.

Jumbo Loans

If you are buying a high-priced home, you may want to consider a jumbo loan. This credit is a mortgage that is greater than the regulated loan limits of Freddie Mac and Fannie Mae ($510,400 in most areas, and higher in high-cost areas). A jumbo mortgage usually comes to 1 or 2 million dollars.

Who are they ideal for?

Jumbo loans are best suited for people who need a mortgage for an amount significantly higher than the median home price in the United States or the typical home price in their area.

What to look out for

To get a jumbo loan, you’ll typically need to have strong credit and the ability to put down a hefty down payment. Keep in mind that the costs of a jumbo loan can be higher than those of a typical mortgage.

Reverse mortgages

If you’re 62 or older and need some money, you might consider a reverse mortgage. A reverse mortgage is a type of home equity loan designed for seniors looking to leverage the equity in their home for additional retirement income.

With a reverse mortgage, the lender pays you back, either in a lump sum cash or in monthly payments. Usually, the balance will have to be paid when you move out of the house, or your spouse (or from the sale of your property) will have to repay the loan if you die.

The amount you can request in a reverse mortgage will depend on several factors:

  • how old he is
  • The value of your home
  • Market interest rates
  • Your ability to pay taxes and other household expenses

Who are they ideal for?

Reverse mortgages offer the greatest benefit to those 62 or older who need funds to help pay for medical care or other regular expenses.

What to look out for

With a reverse mortgage, the amount you owe increases over time as interest and fees are added to the principal. This often results in you, your spouse, or your heirs having to sell the home to pay off the loan once you move out (or if you die).